VisszaAbstract:
Nowadays, consumers' preferences are more and more sophisticated and it is difficult for producers of new goods to efficiently capture their consumers' idiosyncratic willingness to pay. However, it is recognized that consumers are embedded in structured social interactions.Exploiting the networked structure of society, producers may find it profitable to offer discounted prices to those consumers who convince other people to buy. In presence of search costs and heterogeneous willingness to pay, these network-activation based reward programs may serve to expand the client base, through the local flow of information between informed and uninformed consumers.
In this paper, we propose a simple model to analyze the incentives for a monopolist to propose such program. We observe the emergence of a trade-off between the size of the customer base reached and the price charged to uninformed consumers. The balance in this trade-off is driven by the degree distribution in the consumers' social network.
Fixing a network density, the lower the average degree (i.e. the more positively skewed the degree distribution), the more profitable is to run the program.
We then endogenize the market structure in the context of an incumbent-entrant model. We find that offering a network-activation based discount program can be a tool for the incumbent to prevent entry.