Bring your friend! Real or virtual?

Abstract: A monopolist faces a partially uninformed population of consumers, interconnected through a directed social network. In the network, the monopolist offers rewards to informed consumers (influencers) conditional on informing uninformed consumers (influenced). Rewards are needed to bear a communication cost. We investigate the incentives for the monopolist to move to a denser network and the impact of this decision on social welfare. Social welfare increases in information diffusion which, for given communication incentives, is higher in denser networks. However, the monopolist internalizes transfers and thus may prefer an environment with less competition between informed consumers. The presence of highly connected influencers (hubs) is the main driver that aligns monopolist incentives and welfare.