DP15811 Influencing Search
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.
