Document Type

Discussion Paper

Publication Date

1-15-2023

CFDP Number

2358

CFDP Pages

51

Journal of Economic Literature (JEL) Code(s)

M31, M37, D83

Abstract

We compare influencer marketing to targeted advertising from information aggregation and product awareness perspectives. Influencer marketing leverages network effects by allowing consumers to socially learn from each other about their experienced content utility, but consumers may not know whether to attribute promotional post popularity to high content or high product quality. If the quality of a product is uncertain (e.g., it belongs to an unknown brand), then a mega influencer with consistent content quality fosters more information aggregation than a targeted ad and thereby yields higher profits. When we compare influencer marketing to untargeted ad campaigns or if the product has low quality uncertainty (e.g., belongs to an established brand), then many micro influencers with inconsistent content quality create more consumer awareness and yield higher profits. For products with low quality uncertainty, the firm wants to avoid information aggregation as it disperses posterior beliefs of consumers and leads to fewer purchases at the optimal price. Our model can also explain why influencer campaigns either "go viral" or "go bust," and how for niche products, micro-influencers with consistent content quality can be a valuable marketing tool.

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