Referrals in search markets

Maria Arbatskaya and Hideo Konishi

International Journal of Industrial Organization, 2012, vol. 30, issue 1, 89-101

Abstract: This paper compares the equilibrium outcomes in search markets with and without referrals. Although it seems clear that consumers would benefit from referrals, it is not at all clear whether firms would unilaterally provide information about competing offers since such information could encourage consumers to purchase the product elsewhere. In a model of a horizontally differentiated product market with sequential consumer search, we show that valuable referrals can arise in the equilibrium: a firm will give referrals to consumers whose ideal product is sufficiently far away from the firm's offering. We allow firms to price-discriminate among consumers, and consumers to misrepresent their tastes. We found that the equilibrium profits tend to be higher in markets with referrals than in markets without. Consumers tend to be better off in the presence of referrals when search costs are not too low, and under a certain parameter range, referrals lead to a Pareto improvement.

Keywords: Horizontal referrals; Consumer search; Information; Matching; Referral fees (search for similar items in EconPapers)
JEL-codes: C7 D4 D8 L1 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Referrals in Search Markets (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:30:y:2012:i:1:p:89-101

DOI: 10.1016/j.ijindorg.2011.06.002

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