A theory of consumer referral

Tackseung Jun and Jeong-Yoo Kim

International Journal of Industrial Organization, 2008, vol. 26, issue 3, 662-678

Abstract: In this paper, we consider the network as an alternative communication channel to undirected advertising in the market. The main distinctive feature of the network-embedded transaction is the interdependency of buyers' purchasing behavior. Since most transactions in a network are made sequentially, earlier consumers are more valuable to a seller. We characterize the optimal behavior of a seller and consumers in a network. A seller's strategy of paying referral fees can be understood as a way to price discriminate between more valuable consumers and less valuable ones. Numerical simulations demonstrate that social networks may be either over-utilized (if the referral cost is high) or under-utilized (if the referral cost is low).

Date: 2008
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Citations: View citations in EconPapers (8)

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Working Paper: A theory of consumer referral (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:26:y:2008:i:3:p:662-678

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