A new study by researchers at the University of Nottingham, published by the European Centre for Economic Policy Research (CEPR), finds that the common practice of compensating social media influencers based on engagement metrics like follower counts, likes, and comments creates incentives for fraudulent behavior and collusion that can harm both consumers and advertisers.

In their paper, ‘Influencer Cartels,’ Marit and Toomas Hinnosaar expose the dark underbelly of the influencer marketing industry. They uncover how groups of influencers, known as “cartels,” manipulate their engagement numbers to secure higher advertising fees. The researchers use innovative methods, including machine learning analysis of post text and images, to evaluate the quality of engagement originating from these groups compared to organic engagement.

The study differentiates between two types of cartels: “topic cartels,” which only accept influencers posting on specific subjects, and “general cartels,” which have no content restrictions. The researchers find that engagement coming from general cartels is of significantly lower quality for advertisers, providing only 3-18% of the value of natural engagement. Topic cartels perform somewhat better, delivering 60-85% of natural engagement value.

“Our findings lead to three policy implications,” the authors state in the paper. “First, since general cartels are likely to reduce welfare, stronger regulation of their activities would benefit society. Second, regulations that prohibit buying and selling fake social media indicators should also cover in-kind transfers, such as paying for engagement with reciprocal engagement. Third, the current practice of rewarding engagement quantity encourages harmful collusion.”

According to the study, the influencer marketing industry reached $31 billion in spending in 2023, but the authors note that an estimated 15% of this spending is “misused due to exaggerated influence.” Less than 20% of companies currently track the actual sales driven by their influencer campaigns, instead relying on raw engagement metrics to determine influencer compensation.

As a solution, the Hinnosaars propose that advertisers compensate influencers based on the actual value they provide rather than engagement quantity. This shift in approach, they argue, could lead to a more transparent and effective influencer marketing industry. “Luckily, many advertisers are already moving in this direction,” they write. “Until they get there, platforms could improve outcomes by reporting match-quality-weighted engagement.”