Working Paper: CEPR ID: DP15811
Authors: Maarten Janssen; Cole Williams
Abstract: We show that in search markets a social influencer who recommends certainproducts to her followers improves consumer surplus and total welfare despitefirms paying for her recommendation. The key fact that we employ is that individualswho follow an influencer have preferences that are correlated with, butnot identical to, those of the influencer. A recommended firm may charge higherprices, but even so consumers follow the recommendation by first searching therecommended firm. If upon inspecting the good, their match value turns out to besufficiently low, consumers continue to search. The threat of search is importantas it provides the firm an incentive to offer the influencer a financial contract thatinvolves a positive commission and it provides the influencer the incentive to behonest in her recommendation as honesty generates most sales. Finally, we alsoshow that provided that the influencer’s search cost is not too high, the influencerhas an incentive to acquire information and give informative recommendations.
Keywords: Social Media Influencers; Consumer Search; Product Differentiation
JEL Codes: D40; D83; L10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Influencer recommendation (O36) | Consumer surplus (D11) |
| Influencer recommendation (O36) | Total welfare (D69) |
| Consumer preferences correlation (D12) | Influencer recommendation (O36) |
| Influencer recommendation (O36) | Firm pricing strategies (L11) |
| Search costs (G19) | Influencer information acquisition (D83) |
| Influencer information acquisition (D83) | Influencer recommendations (O36) |
| Influencer recommendations (O36) | Consumer search behavior (D12) |
| Consumer search behavior (D12) | Firm sales (L21) |
| Threat of search (D83) | Financial contracts to influencers (G13) |
| Financial contracts to influencers (G13) | Honest recommendations (Y30) |