Do Online Social Networks Increase Welfare?

Manuel Mueller-Frank and Mallesh M. Pai ()
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Mallesh M. Pai: University of Pennsylvania, Postal: Philadelphia, PA 19104, United States, http://www.upenn.edu/

No D/1118, IESE Research Papers from IESE Business School

Abstract: We consider a strategic online social network that controls information flows between agents in a social learning setting. Agents on the network select among products of competing firms of unknown quality. The network sells advertising to firms. We consider display advertising, which is standard firm-to-consumer advertising, and social advertising, in which agents who purchased that firm's product are highlighted to their friends. We show that in equilibrium, information is unbiased relative to a setting with no advertising. However, the network reduces the information agents see about others' purchases, since this increases advertising revenue. Hence consumer welfare is lower than in the first-best.

Keywords: social networks; advertising; search (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-02-27
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Citations: View citations in EconPapers (1)

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