Localized price promotions as a quality signal in a publicly observable network

This paper considers a quality signaling game in which consumers share information on quality with their neighbors in a social network. The firm chooses a set of consumers to whom to offer their product and a price across two stages of sales. When this publicly-observable localization is available, the cheapest way for the high quality seller to separate herself from a low quality seller is to initially offer the product to the smallest set of consumers who will saturate the network with word-of-mouth; targeting a set that generates less word-of-mouth will require more money-burning to successfully signal. The set is idiosyncratic and identifying it requires considering the connectivity of sets of nodes in the network collectively, rather than relying on individual measures of connectivity. Observable networks therefore enable credible signaling that is less socially wasteful than would otherwise be the case, and this benefit is greater the smaller is the set of consumers which will cover the network with word-of-mouth.