Liking and Following and the Newsvendor: Operations and Marketing Policies Under Social Influence

social influenceMing Hu
University of Toronto – Rotman School of Management

Joseph Milner
University of Toronto – Rotman School of Management

Jiahua Wu
Imperial College Business School

September 10, 2014

Rotman School of Management Working Paper No. 2292787

Abstract:
We consider a monopolistic firm selling two substitutable products to a stream of sequential arrivals whose purchase decisions can be influenced by earlier purchases. Before demand realizes, the firm faces a newsvendor problem for the two products with economies of scale in production for each. When consumers are responsive to others’ decisions, social influence amplifies demand uncertainty, leading to a lower profit for the firm. We propose three solutions for the firm to better cope with or even benefit from social influence: reduced product assortment, influencer recruitment, and production postponement. Firstly, as the potential substitutability between products increases due to social influence, the firm may leverage the increased substitutability and enjoy lower cost in production by reducing product assortment. Secondly, the firm can offer promotional incentives to recruit consumers as influencers. We reveal an operational benefit of influencer marketing that a very small fraction of such influencers is sufficient to diminish sales’ unpredictability. Lastly, production postponement, allowing the firm to react to pre-order information, improves the accuracy of demand forecast. The optimal production time is highly sensitive to consumers’ responsiveness to others’ decisions when marginal cost increase from postponing production over time is moderate.

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