DP15811 Influencing Search

Author(s): Maarten Janssen, Cole Williams
Publication Date: February 2021
Keyword(s): consumer search, product differentiation, social media influencers
JEL(s): D40, D83, L10
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15811

We show that in search markets a social influencer who recommends certain products to her followers improves consumer surplus and total welfare despite firms paying for her recommendation. The key fact that we employ is that individuals who follow an influencer have preferences that are correlated with, but not identical to, those of the influencer. A recommended firm may charge higher prices, but even so consumers follow the recommendation by first searching the recommended firm. If upon inspecting the good, their match value turns out to be sufficiently low, consumers continue to search. The threat of search is important as it provides the firm an incentive to offer the influencer a financial contract that involves a positive commission and it provides the influencer the incentive to be honest in her recommendation as honesty generates most sales. Finally, we also show that provided that the influencer's search cost is not too high, the influencer has an incentive to acquire information and give informative recommendations.