Are we buddies- evaluating the impact of “word-of-mouth” on competing pricing strategies

This paper quantifies the effect of “word-of-mouth” marketing strategy on pricing decisions in a competing duopoly market. Assuming that consumer arrivals follow a Poisson Process, a consumer´s purchasing decision depends on his individual judgment and probability of his friends´ existing selections, who connect to him in a `scale-free´ social network. Firms then make pricing decisions responding to the social interactions. Based on a multi-agent modeling and simulation approach, the paper finds that firms can price higher and are better off when consumers´ purchasing decisions are influenced by their friends´ selection. In addition, one firm could achieve competition advantage by offering rebate to early consumers if the other does not.