IDEAS home Printed from https://ideas.repec.org/p/qed/wpaper/1301.html
   My bibliography  Save this paper

Externalities Social Value And Word Of Mouth

Author

Listed:
  • Pier-Andre Bouchard St-Amant

    (Department of Economics, Queen's University)

Abstract

I examine an environment where advertisers can "seed" word-of-mouth advertising by providing initial information about a product to specific users of a social network. Discussion over a social network generates spillover effects for firms when consumers can use the social network to inform each other about products. When a firm can exploit a social network's structure, it can increase its sales. However, when the network formation process is costly, firms free-ride on such costs at the expense of agents on the network. If agents can form coalitions, I show that they can recoup the value of this externality by charging a toll. When users actively modify the information, generating word-of-mouth advertising about a product provides a "social value." This social value stems from the discussions that agents have about the product, without any intervention. Since this process occurs regardless of the firm's actions, the firm cannot capture such valuation. The opinion leaders, or highly regarded agents on the network, play a key role in the formation of this social value.

Suggested Citation

  • Pier-Andre Bouchard St-Amant, 2013. "Externalities Social Value And Word Of Mouth," Working Paper 1301, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1301
    as

    Download full text from publisher

    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_1301.pdf
    File Function: First version 2013
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Joseph Farrell & Garth Saloner, 1985. "Standardization, Compatibility, and Innovation," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 70-83, Spring.
    2. Ting Liu & Pasquale Schiraldi, 2012. "New product launch: herd seeking or herd preventing?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(3), pages 627-648, November.
    3. David Godes & Dina Mayzlin, 2009. "Firm-Created Word-of-Mouth Communication: Evidence from a Field Test," Marketing Science, INFORMS, vol. 28(4), pages 721-739, 07-08.
    4. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 797-817.
    5. Galeotti, Andrea & Ghiglino, Christian & Squintani, Francesco, 2013. "Strategic information transmission networks," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1751-1769.
    6. Vettas, Nikolaos, 1997. "On the Informational Role of Quantities: Durable Goods and Consumers' Word-of-Mouth Communication," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(4), pages 915-944, November.
    7. Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-440, June.
    8. Galeotti, Andrea & Ghiglino, Christian & Squintani, Francesco, 2009. "Strategic Information Transmission in Networks," Economics Discussion Papers 2974, University of Essex, Department of Economics.
    9. de Martí Beltran, Joan, 2009. "Matthew O. Jackson, Social and Economic Networks , Princeton University Press (2008)," Regional Science and Urban Economics, Elsevier, vol. 39(5), pages 644-645, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christophe Bravard & Sudipta Sarangi & ANNE NOUWELAND & MARCO SLIKKER, 2016. "The Position Value for Partition Function Form Network Games," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 18(2), pages 226-247, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sgrignoli, P. & Agliari, E. & Burioni, R. & Schianchi, A., 2015. "Instability and network effects in innovative markets," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 108(C), pages 260-271.
    2. Robin Cowan & William Cowan & G.M. Peter Swann, 2004. "Waves in consumption with interdependence among consumers," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 37(1), pages 149-177, February.
    3. Daron Acemoglu & Asuman Ozdaglar, 2011. "Opinion Dynamics and Learning in Social Networks," Dynamic Games and Applications, Springer, vol. 1(1), pages 3-49, March.
    4. Tatsuhiro SHICHIJO & Yuji NAKAYAMA, 2004. "A Way To Sell Goods With Network Externalities," Econometric Society 2004 Far Eastern Meetings 711, Econometric Society.
    5. Sujoy Chakravarty, 2003. "Experimental Evidence on Product Adoption in the Presence of Network Externalities," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3), pages 233-254, December.
    6. Navarro, Noemí, 2012. "Price and quality decisions under network effects," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 263-270.
    7. A. Bassanini & G. Dosi, 1998. "Competing Technologies, International Diffusion and the Rate of Convergence to a Stable Market Structure," Working Papers ir98012, International Institute for Applied Systems Analysis.
    8. Alexei Parakhonyak & Nick Vikander, 2019. "Optimal Sales Schemes for Network Goods," Management Science, INFORMS, vol. 65(2), pages 819-841, February.
    9. Oz Shy, 2011. "A Short Survey of Network Economics," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 38(2), pages 119-149, March.
    10. Liangjie Zhao & Wenqi Duan, 2014. "Simulating the Evolution of Market Shares: The Effects of Customer Learning and Local Network Externalities," Computational Economics, Springer;Society for Computational Economics, vol. 43(1), pages 53-70, January.
    11. , & , & ,, 2014. "Dynamics of information exchange in endogenous social networks," Theoretical Economics, Econometric Society, vol. 9(1), January.
    12. Pier-Andre Bouchard St-Amant, 2012. "Getting The Right Spin: A Theory Of Value Of Social Networks," Working Paper 1293, Economics Department, Queen's University.
    13. Hattori, Keisuke & Zennyo, Yusuke, 2018. "Heterogeneous Consumer Expectations and Monopoly Pricing for Durables with Network Externalities," MPRA Paper 89893, University Library of Munich, Germany, revised 08 Nov 2018.
    14. Paul Windrum, 2003. "Unlocking a Lock-in: Towards a Model of Technological Succession," Chapters, in: Pier Paolo Saviotti (ed.), Applied Evolutionary Economics, chapter 11, Edward Elgar Publishing.
    15. Nicolás Figueroa & Carla Guadalupi, 2017. "Convincing early adopters: Price signals and Information transmission," Documentos de Trabajo 486, Instituto de Economia. Pontificia Universidad Católica de Chile..
    16. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, September.
    17. Goldfarb, Brent & Kirsch, David & Miller, David A., 2007. "Was there too little entry during the Dot Com Era?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 100-144, October.
    18. Bhalla, Manaswini, 2011. "Endogenous order and information aggregation," Research in Economics, Elsevier, vol. 65(4), pages 319-331, December.
    19. Lori Rosenkopf & Eric Abrahamson, 1999. "Modeling Reputational and Informational Influences in Threshold Models of Bandwagon Innovation Diffusion," Computational and Mathematical Organization Theory, Springer, vol. 5(4), pages 361-384, December.
    20. James D. Campbell, 2015. "Localized price promotions as a quality signal in a publicly observable network," Quantitative Marketing and Economics (QME), Springer, vol. 13(1), pages 27-57, March.

    More about this item

    Keywords

    Network; Word of Mouth; Externalities; Social Value;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:1301. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark Babcock (email available below). General contact details of provider: https://edirc.repec.org/data/qedquca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.