Optimal budget allocation in social networks: Quality or seeding?

In this paper, we study a strategic model of marketing and product consumption in social networks. We consider two competing firms in a market providing two substitutable products with preset qualities. Agents choose their consumptions following a myopic best response dynamics which results in a local, linear update for the consumptions. At some point in time, firms receive a limited budget which they can use to trigger a larger consumption of their products in the network. Firms have to decide between marginally improving the quality of their products and giving free offers to a chosen set of agents in the network in order to better facilitate spreading their products. We derive a simple threshold rule for the optimal allocation of the budget and describe the resulting Nash equilibrium. It is shown that the optimal allocation of the budget depends on the entire distribution of centralities in the network, quality of products and the model parameters. In particular, we show that in a graph with a higher number of agents with centralities above a certain threshold, firms spend more budget on seeding in the optimal allocation. Furthermore, if seeding budget is nonzero for a balanced graph, it will also be nonzero for any other graph, and if seeding budget is zero for a star graph, it will be zero for any other graph too. We also show that firms allocate more budget to quality improvement when their qualities are close, in order to distance themselves from the rival firm. However, as the gap between qualities widens, competition in qualities becomes less effective and firms spend more budget on seeding.