Word-Of-Mouth and estimating demand based on network structure and epidemic models

Word Of Mouth (WOM) is proved to be important in diffusing information to the uninformed people and affecting their buying intentions. In this paper, the social network built upon the trust between the members of a society is considered as the target market, and WOM is treated as a contagious infection whose diffusion depends on the social network’s structure. Accordingly, we construct a framework using Susceptible-Infected-Susceptible (SIS) epidemic model to derive demand functions based on the type of the network, price, average network density, and advertising level. For scale-free and regular (as a benchmark) networks, the demand functions are derived, and then the optimum pricing and advertising policies are obtained, accordingly. It is concluded that in a denser network, price and advertising levels are higher. Furthermore, network-based model shows that price sensitivity of demand is lower (higher) for lower (higher) prices. Moreover, it is concluded that the optimum price in a heterogeneous social network (i.e. with a few members having many links and many members having a few links) is higher than that of a homogeneous network.