A Model of Dynamic In-consumption Social Interaction

In digital content consumption, social interaction becomes a vital component that drives consumers’ overall experience and willingness-to-pay for digital content.
Despite the ubiquitous prevalence and growing trend of in-consumption social interaction, firms face new challenges: the loss of direct control over consumer experience and the uncertainty of real-time social interactions, potentially dampening consumer experience and hurting firms’ profitability. Hence, managing social interaction becomes a critical problem for both firms and policymakers — who can participate, and how will social interaction change the paywall strategy? To answer these questions, we construct a continuous time model in which a consumer’s willingness-to-pay for the product is dynamically shaped both by idiosyncratic shocks and social interactions with other consumers. We find that a firm benefits from allowing social interaction, even when downward social influence outweighs upward influence. The equilibrium price is lower, but demand is higher compared to the no-interaction benchmark. Moreover, when downward social influence is stronger than the upward one, the impact of social intensity on a firm’s profitability hinges on a term we coin as “social elasticity” — the effect of a one-unit change in the intensity of social interactions on the reduction in demand. We show that a firm’s profit can still increase with interaction intensity so long as the social elasticity is sufficiently small. We then extend the analysis to examine the interplay between a firm’s innate content quality and social interactions and the case of purely interactive digital consumption.