Price Discounts and Peer Effects in Information Goods: A Large Scale Randomized Experiment
This paper looks at the interplay between price promotions and word-of-mouth identifying both of them empirically using outcomes from a randomised field experiment conducted in the Video-on-Demand (VoD) system of a large European telco offering triple-play to roughly half a million households. We show that the sales of movies offered at discounted prices increase 30% and that households who had access to these movies purchased 3% fewer movies during the entire experiment. These results, now for the case of a hedonic information good, are in line with prior literature showing that price promotions of storable goods increase short-term sales but can also lower the consumers' willingness to pay potentially hurting firm profitability. We use call detailed records at this same provider to draw a graph of social proximity across households. Using this graph we find a positive effect of word-of-mouth on the sales of movies in this VoD system, which is particularly large for the movies offered to households at discounted prices. This result shows that in some network settings price promotion campaigns can be designed in ways that generate enough word-of-mouth allowing firms to maintain sales and/or profit levels. Firms using social network information to this end are therefore likely to perform better in the marketplace.