Competitive Diffusion in Social Networks: Quality or Seeding?

Abstract

In this paper, we study a strategic model of marketing and product consumption in social networks. We consider two firms in a market competing to maximize the consumption of their products. Each firm has a limited budget which can be invested on the quality of the product or spent on seeding key individuals in the network to incentivize others to consume more of their product. After the decision of firms, agents choose their consumptions following a myopic best response dynamics which results in a local, linear update for their consumption decision. We characterize the unique Nash equilibrium of the game between firms and study the effect of the budgets as well as the network structure on the optimal allocation. We show that at the equilibrium, firms invest more budget on quality when their budgets are close to each other. However, as the gap between budgets widens, competition in qualities becomes less effective and firms spend more of their budget on seeding. We also show that given equal budget of firms, if the seeding budget is nonzero for a balanced graph, it will also be nonzero for any other graph, and if the seeding budget is zero for a star graph it will be zero for any other graph as well. As a practical extension, we then consider a similar setup for two products that are already being offered with some preset qualities in a network. At some point in time, firms learn about the network structure and decide to utilize a limited budget to mount their market share by either improving the quality or new seeding some agents to incline consumers toward their products. We show that the optimal budget allocation in this case simplifies to a threshold strategy. Interestingly, we derive similar results to those of the original problem, in which preset qualities simulate the role that budgets had in the original setup