Referrals in Search Markets

Maria Arbatskaya and Hideo Konishi

No 614, Boston College Working Papers in Economics from Boston College Department of Economics

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 suffciently far from the firms offering. We allow firms to price-discriminate among consumers, and consumers to misrepresent their tastes. It is found that the equilibrium profits tend to be higher in markets with referrals than in the ones without. Consumers tend to be better o¤ 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; broker commission. (search for similar items in EconPapers)
JEL-codes: C7 D4 D8 L1 (search for similar items in EconPapers)
Date: 2005-07-27, Revised 2011-05-10
New Economics Papers: this item is included in nep-gth and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations:

Forthcoming, International Journal of Industrial Organization

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Journal Article: Referrals in search markets (2012)
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