Advertising to a social network |
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Authors: | Peter Pal Zubcsek Miklos Sarvary |
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Institution: | (1) University of Florida, Gainesville, FL 32611, USA;(2) INSEAD, Bd. de Constance, 77305 Fontainebleau, France |
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Abstract: | Direct advertising—sending promotional messages to individual customers—is increasingly used by marketers as a result of the
recent improvements in consumer reachability. Most current methods to calculate optimal budgets for such advertising campaigns
consider customers in isolation and ignore word-of-mouth communication (WOM). When the customer base forms a network (as is
the case in telecom or social network databases) ignoring WOM clearly leads to suboptimal advertising budgets. This paper
develops a model to help address this challenge. We assume that firms know the network structure formed by customers but do
not know (or are not allowed to use) data on individuals’ connections. Under this scenario, we compare the optimal campaign
of a monopolist to that of firms competing in simultaneous-move or sequential-move games. The analysis provides two key insights:
(i) we show that ignoring the existence of WOM leads to significant profit loss for firms and this is more so under competition.
In particular, knowing the “density” of consumer connections is crucial for the design of optimal campaigns. (ii) Competition
in direct advertising exhibits strong first-mover advantages and, even in a simultaneous-move game between identical firms,
highly asymmetric outcomes are possible. The paper also explores two extensions. First, we study the nature of the trade-off
between increasing network size versus increasing the connectivity between existing network members. Second, we investigate
how firms’ advertising activity may endogenously grow the membership base. |
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