Measuring the Demand Effects of Formal and Informal Communication : Evidence from Online Markets for Illicit Drugs

TL;DR

This paper investigates how formal and informal online communications influence demand in illicit drug markets, showing that both types of communication significantly affect consumer behavior and that vendor credibility and message volume also play roles.

Contribution

It provides empirical evidence on the impact of online communication channels on demand in illicit markets, highlighting the roles of vendor credibility and message volume.

Findings

Communication on reviews and forums equally influences demand

Vendor commitment to disclosure reduces communication's impact

Demand increases with message volume and positive sentiment

Abstract

I present evidence that communication between marketplace participants is an important influence on market demand. I find that consumer demand is approximately equally influenced by communication on both formal and informal networks- namely, product reviews and community forums. In addition, I find empirical evidence of a vendor's ability to commit to disclosure dampening the effect of communication on demand. I also find that product demand is more responsive to average customer sentiment as the number of messages grows, as may be expected in a Bayesian updating framework.