Price Discounts and Peer Effects in Information Goods: Results from a Randomized Experiment

Abstract

We look at the interplay between price promotions and peer influence in the case of movies in Video-on-Demand (VoD), which are non-storable information goods. We analyze the outcomes from a randomized experiment run for 3 consecutive months using the VoD system of a large telecommunications provider. We show that households with access to movies priced 25% lower than usual lease 11.1% more of these movies than households that never had access to movies at reduced prices. However, they also lease 3.3% fewer of the movies without price discounts during the entire experiment, which reduces aggregate sales by 2.9% hurting the provider’s profitability. We use cell phone call detail records from this provider to infer a graph of social proximity across households. The average degree in this graph is 10.23 friends. Using this graph, we find a positive effect of peer influence in the consumption of movies in this VoD system, which can be strategically used by the firm to issue price promotions minimizing profit losses. Firms can break-even if they offer price promotions to households with enough connections to generate enough sales through peer influence to counter the undesirable effect of price promotions. We show how the ability of the firm to break-even depends on the magnitude of the effect of peer influence, the discount offered and the markup factor. At the average of the covariates observed in our setting, the firm breaks-even if it offers price promotions to households with more than 4 connections.