A Theory of Consumer Referral: Revisited

Abstract

Jun and Kim (2008) consider the optimal pricing and referral strategy of a monopoly that uses a consumer communication network to spread product information. They show that for any finite referral chain, the optimal policy involves a referral fee that provides strictly positive referral incentives and effective price discrimination among consumers based on their positions in the chain. We revisit this problem to strengthen Jun and Kim's results by weakening their referral condition. Moreover, we characterize the first-best policy when individual-specific referral fees are available and show that it is qualitatively similar to the second-best solution of Jun and Kim (2008).