Abstract: Influenced by social media, more and more firms have developed sharing reward programs (SRPs) to attract potential customers. Potential customers can be reached through SRPs when existing customers refer to their friends. And the persuasion effect is more effective than mass advertisement due to the social capital among users on social media. However, the SRP can also cost the firms a lot because the bonuses are highly dependent on the successful purchase of the inductees. Thus, the main objectives of the paper are to answer the following questions: (1) Compared with traditional mass advertising marketing, whether it is more profitable to adopt SRPs? (2) How to design the optimal mechanism of SRPs? (3) How to utilize firms’ capital to stimulate the inductors to persuade their friends to purchase the products? A “nested” Stackelberg game is developed, which includes an inner game and an outer game. The inner game is between the inductor and the inductee. For the given bonus and discount, the inductor who is the leader firstly decides whether to make efforts to share information to their friend (the inductee). Then the inductee decides whether to purchase the products. The outer game is among the firm, the inductor and the inductee, where the firm acts as the game leader. Once the inner game equilibrium is reached, the firm’s optimal sharing bonus and the discount can be determined. Meanwhile the comparison of profits is made between mass advertising marketing and sharing reward program. Some interesting observations are found. First, there are optimal three kinds of reward strategies of sharing reward program, which are reward the inductee only, reward the inductor only and reward both. The choice of the strategy is relied on price and relationship between users. Second, the choice of the strategy is relied on price and relationship between users. If the relationship is weak, the impact of discount is stronger than the impact of sharing. And it is reasonable to reward the inductee only. It is on the contrary if the relationship is strong. And it is suitable to reward the inductor only. Moreover, the main factors which have influence on whether adopting direct marketing or sharing reward program are market penetration and social relationship. Taking the social relationship into consideration, the study makes some contribution to the research of sharing reward program mechanism. And it also implies that firms should take full advantage of social capital among users when deploying the capital to inductors or inductees.

Key words: social media, sharing behavior, marketing strategy, reward program