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IESE Research Papers,
IESE Business School

No D/1118: Do Online Social Networks Increase Welfare?

Manuel Mueller-Frank () and Mallesh M. Pai ()
Additional contact information
Manuel Mueller-Frank: IESE Business School, Postal: IESE Business School. Research Division, Av Pearson 21, 08034 Barcelona, SPAIN
Mallesh M. Pai: University of Pennsylvania, Postal: Philadelphia, PA 19104, United States

Abstract: We consider a strategic online social network that controls information flows between agents in a social learning setting. Agents on the network select among products of competing firms of unknown quality. The network sells advertising to firms. We consider display advertising, which is standard firm-to-consumer advertising, and social advertising, in which agents who purchased that firm's product are highlighted to their friends. We show that in equilibrium, information is unbiased relative to a setting with no advertising. However, the network reduces the information agents see about others' purchases, since this increases advertising revenue. Hence consumer welfare is lower than in the first-best.

Keywords: social networks; advertising; search

34 pages, February 27, 2015

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