Bring your friend! Real or virtual?

TL;DR

This paper examines how a monopolist's incentives to promote information diffusion through social networks affect social welfare, highlighting the role of network density and influential hubs in optimizing outcomes.

Contribution

It introduces a model analyzing the monopolist's strategic incentives to influence network density and the impact on social welfare, emphasizing the importance of influential hubs.

Findings

Social welfare increases with information diffusion in denser networks.

The monopolist prefers environments with fewer competing informed consumers due to internalized transfers.

Highly connected influencers (hubs) align monopolist incentives with social welfare.

Abstract

A monopolist faces a partially uninformed population of consumers, interconnected through a directed social network. In the network, the monopolist offers rewards to informed consumers (influencers) conditional on informing uninformed consumers (influenced). Rewards are needed to bear a communication cost. We investigate the incentives for the monopolist to move to a denser network and the impact of this decision on social welfare. Social welfare increases in information diffusion which, for given communication incentives, is higher in denser networks. However, the monopolist internalizes transfers and thus may prefer an environment with less competition between informed consumers. The presence of highly connected influencers (hubs) is the main driver that aligns monopolist incentives and welfare.