Social networks in industrial organization

Abstract

Chapter 1 studies the optimal strategies of a monopolist selling a good to consumers who engage in word of mouth communication. The monopolist uses the price it charges to influence both the proportion of the population that is willing to purchase the good and the pattern of communication that takes place within the social network. I find a number of results: (i) demand is more elastic in the presence of word of mouth; (ii) the monopolist reduces the price to induce additional word of mouth for regular goods, however for goods whose valuation is greater for well connected individuals the price may, in fact, be greater; (iii) the optimal pattern of diffusion involves introductory prices which vary up and down; and (iv) exclusive (high priced) products will optimally target advertising towards individuals with many friends whereas common (low priced) products will target individuals with fewer friends. Chapter 2 presents a model of friendship formation in a social network. During each period a new player enters the social network, this player searches for and forms friendships with the existing population and all individuals play a prisoner's dilemma game with each of their friends. The set of friendships a player forms reveals some information to a friend about how likely she is to subsequently cooperate. Cooperative types are able to separate themselves from uncooperative types by becoming friends with people who know one another.

(cont.) The threat of communication amongst people who know one another prevents an uncooperative type mimicking a cooperative type. Chapter 3 analyzes the effects of policies which support electricity generation from intermittent technologies (wind, solar). I find that intermittent generation is a substitute for baseload technologies but may be complementary or substitutable for peaking/intermediate technologies. I characterize the long run implications of this for carbon emissions.