Promotional Chat on the Internet

Jaewook Kim

Content

IntroductioncMotive

Results

Promotional Chat Rooms and ExamplesPromotional Chat Rooms and Examples

Three Main Questions

B i M d lBasic ModelGame theory

Messaging Online

Firm’s Problem

Consumer’s Problem

Perfect Bayesian Equilibrium

Consumer Welfare and Value of Information

Discussion and ConclusionDiscussion and Conclusion

Introduction

Motive

f ?

Motive

Word of mouth online, is it credible?

Which products should the firms promote?

Inferior or Superior?

How does consumer welfare come into play?

Introduction

ResultsResults

Unique Equilibrium exists

Where online chat is still credible

Firms spend more on inferior products

Consumer welfare and price are inversely proportional

Introduction

Promotional Chat Rooms and Examples

C A

Promotional Chat Rooms and Examples

Christina Aguilera debut album

www.movie.Naver.com

www.IMDB.com

www.dcIncide.com

Introduction

Comparison

Promo. Chat

Manual

Traditional Marketing

Automated

More Convincing

Everyday Speak Marketing SpeakEveryday Speak

Few Regulations

Must come from inside

g p

Many Regulations

Must come from inside

the community

Introduction

Three main questionsThree main questions

Is word of mouth online persuasive

Valuable for a firm whose product is more appealing or less appealing

Relative consumer welfare benefits and losses by promo chat. c y p c

Basic Model

Game Theory

A BFirm Firm

Uninformed InformedDC UninformedCostumer

InformedCostumer(Early Adapter)

Basic Model

A d B ti fi

Game Theory

A and B are competing firms

The firms and D have knowledge of superior product

If A is superior →

If B is superior →If B is superior →

Probability that

Two possible messages: “AB” A is superior than Bp g p

“BA” B is superior than A

Basic Model

Game Theory

A BSuperior FirmSends “AB”

Inferior FirmSends “BA”

Informed DC Costumer

(Early Adapter)Sends “AB”

Basic Model

InformedGame Theory

A BSuperior FirmSends “AB”

Inferior FirmSends “BA”

Informed DC Costumer

(Early Adapter)Sends “AB”

Basic Model

Game Theory

A BSuperior FirmSends “AB”

Inferior FirmSends “BA”

Uninformed

Informed

Uninformed

DC Costumer(Early Adapter)Sends “AB”

Basic Model

Ch t

Game Theory

Chat

State of world observed by

Prices are set A, B, D send

C receives one message;

C buysOne

A,B,D messages C may changeprior belief

product

Messaging online

Firm’s Problem

Consumer’s Problem

Perfect Bayesian Equilibrium

Proposition 1. If = ½ and the parameters satisfy one of the

following inequalities an unique perfect Bayesian equilibrium existsfollowing inequalities, an unique perfect Bayesian equilibrium exists,

and it is persuasive. In this equilibrium the firm with the superior

Product has a higher expected profit.

(1)

(2)

(3)

Perfect Bayesian Equilibrium

Proposition 2. The likelihood ratio of the signals,

is decreasing in P and increasing in

Increase in Price increases the incentive for firms to post messages

increases noise into the system

Increase in increases signal to noise rationIncrease in increases signal to noise ration

Consumer Welfare and Value of InformationInformation

(1) system with word of mouth but no promotional chat

Regulated SystemRegulated System

Anonymous Promotion is outlawed

Upper bound of consumer welfare

(2) system with neither word of mouth nor promotional Chat

No Online Promotion

C purchases solely on prior beleif

Lower bound of consumer welfare

Consumer Welfare and Value of InformationInformation

Proposition 3.

The value of information(welfare loss) due to anonymous promotion isThe value of information(welfare loss) due to anonymous promotion is

increasing(decreasing) in , increasing in and

decreasing(increasing) in P.

Discussion and Conclusion

supports the superior firm

Superior firm has an incentive to increaseSuperior firm has an incentive to increase

depends on action prior to promotional chat

increase

decrease promotional chat SNR

Anonymity allows firms to directly manipulate consumersp

Still informative due to actions of legitimate chatters.

Firms with lower quality engage in more promotional chatFirms with lower quality engage in more promotional chat

They have more reason to promote:

no free publicity