EconPapers    
Economics at your fingertips  
 

Contracting with Word-of-Mouth Management

Yuichiro Kamada () and Aniko Öry
Additional contact information
Yuichiro Kamada: Haas School of Business, University of California Berkeley, http://facultybio.haas.berkeley.edu/faculty-list/kamada-yuichiro/

No 2048R2, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We propose a model for word of mouth (WoM) management where a firm has two tools at hand: referral rewards and offering a free contract. Current customers’ incentives to engage in WoM can affect the contracting problem of a rm in the presence of positive externalities of users. Formally, we consider a classic Maskin-Riley contracting problem for the receiver of WoM where the firm can pay the sender’s referral rewards and a sender experiences positive externalities if the receiver adopts. A free contract can incentivize WoM because the higher adoption probability increases the expected externalities that the sender receives. We characterize the optimal incentive scheme and show when the two tools serve as substitutes and complements to each other depending on whether the market is niche and whether the product is social. We show that offering a free contract is optimal only if the fraction of premium users in the population is small, which is consistent with the observation that companies that successfully offer freemium contracts oftentimes have a high percentage of free users.

Keywords: Word-of-mouth; referral rewards; freemium; contract theory (search for similar items in EconPapers)
JEL-codes: D82 L21 M3 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2016-07, Revised 2018-08
Note: Includes Supplemental Material
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://cowles.yale.edu/sites/default/files/files/pub/d20/d2048-ar2.pdf (application/pdf)

Related works:
Working Paper: Contracting with Word-of-Mouth Management (2017) Downloads
Working Paper: Contracting with Word-of-Mouth Management (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:2048r2

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Matthew Regan ().

 
Page updated 2020-02-19
Handle: RePEc:cwl:cwldpp:2048r2