Manuel Foerster (Bielefeld University, Center for Mathematical Economics) – Strategic use of social media influencer marketing

We build a model of social media influencer marketing in which a firm may hire influencers to inform consumers of an innovation. Influencers generate sales through purchases of their followers and followers’ social networks. While rational consumers learn product quality before purchase, naïve consumers don’t and instead follow the advice of influencers and peers. In equilibrium influencers price according to their contribution to sales, which depends on the number of followers. In turn, the firm hires an influencer if her contribution to sales exceeds the costs of producing the endorsement. The quality of the endorsement and the product price is such that it maximizes industry profits. In particular, the firm will exploit consumers’ na ̈ıvit ́e and make influencers provide exaggerated endorsements along with overpricing of the product if product quality is relatively low. We further show how equilibrium profits depend on the players’ relative market power.