Random encounters and information diffusion about product quality

J.J. Gabszewicz, Marco Marini and S. Zanaj
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J.J. Gabszewicz: Université catholique de Louvain, LIDAM/CORE, Belgium
S. Zanaj: University of Luxembourg

No 3296, LIDAM Reprints CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper explores how social interactions among consumers shape markets. In a two‐country model, consumers meet and exchange information about the quality of the goods. As information spreads, demand evolves, affecting the prices and quantities manufactured by profit‐maximizing firms. We show that market prices with informational frictions reach the duopoly price with full information at the limit. However, this convergence can take different paths depending on the size asymmetry between countries. In particular, when the country producing the low‐quality good is relatively large, the single market does not immediately turn into a duopoly and can be temporarily trapped in a situation of price instability where no Nash equilibrium in pure (but only in mixed) strategies exists and prices can fluctuate between their monopoly and duopoly levels. It follows that the classical price‐reducing effects of international trade may take longer to appear. In view of an intense globalization process, understanding how social meetings affect market outcomes is critical for understanding the performance of international economic integration.

Pages: 30
Date: 2024-01-01
Note: In: Journal of Economics & Management Strategy, 2023, vol. 32(2), p. 348-376
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Related works:
Journal Article: Random encounters and information diffusion about product quality (2023)
Working Paper: Random Encounters and Information Diffusion about Product Quality (2021)
Working Paper: Random Encounters and Information Diffusion about Product Quality (2021)
Working Paper: Random Encounters and Information Di§usion about Product Quality (2021)
Working Paper: Random Encounters and Information Diffusion about Product Quality (2021)
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