The Value of Network Information

The business model of companies such as Facebook, MySpace, and Twitter, relies on monetizing the information on the interactions and influences of their users. How valuable is such information, and is its use beneficial or detrimental for consumer welfare? We study these questions in a model where a monopoly sells a network good and may price discriminate using network information: information on consumers influences and/or on consumers susceptibilities to influence. Our framework incorporates a rich set of market products, including goods characterized by global and local network effects. We derive results on the value of network information and determine under which conditions, relative to uniform price, consumer surplus increases. We demonstrate the applicability of our framework using survey data on various types of relationships. ∗Fainmesser: Department of Economics, Brown University, Providence, RI 02912 (email: Itay [email protected]); Galeotti: Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3S, United Kingdom (email: [email protected]). We thank Matt Jackson, Shachar Kariv, Jacob Leshno, Markus Mobius, and participants to seminars at The University of California and Berkeley, Stanford University, Brown University, Microsoft Research New England, Tel Aviv University, Ohio State University, and The University of Essex, for valuable comments. We thank Neil Thakral, Michael Thaler, and Stephen Nei for excellent research assistance. Itay Fainmesser is greatful to the Economics Department at Stanford University for their hospitality and financial support during the academic year 2013-14. Andrea Galeotti is grateful to the European Research Council for support through ERC-starting grant (award no. 283454) and to The Leverhulme Trust for support through the Philip Leverhulme Prize.