Word-of-mouth communication and percolation in social networks

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This paper develops a model of demand, pricing and advertising in the presence of social learning via word-of-mouth communication between friends. In the model consumers must receive information about a monopolist's product in order to consider purchasing it. The presence of word-of-mouth is not sufficient for demand to be more elastic and prices to be lower compared to an informed population. I derive the comparative static results of connectivity, mean-preserving spread of friendships, and clustering of friends on prices. The optimal targets for advertising are not, generically, the individuals with the most friends.
Original languageEnglish
Pages (from-to)2466-2498
Number of pages33
JournalAmerican Economic Review
Issue number6
Publication statusPublished - Oct 2013
Externally publishedYes

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