Word-of-Mouth Communication and Community Enforcement

Illtae Ahn and Matti Suominen

International Economic Review, 2001, vol. 42, issue 2, 399-415

Abstract: We study a repeated game where a seller, who has a short-term incentive to supply low quality, is periodically matched with a randomly selected buyer. Buyers observe only the outcomes of their neighbors' games and may receive signals from them. When the buyer population is large, the seller may sell high quality even when each buyer observes her action in any given period with an arbitrarily small probability. When networking among buyers is costly, low quality is always supplied with a positive probability. For this case, we characterize an equilibrium where the seller randomizes between high and low quality.

Date: 2001
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