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Word of Mouth Communication and Search

Arthur Campbell, Christian Leister () and Yves Zenou ()

No 12326, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In many economic contexts, the most credible source of information about the quality of products is one's friends. In this paper, we develop a word-of-mouth model of search for an experience good where the quality is unknown. We find the characteristics of the social net-work that result in exclusively low quality, a mixture of qualities and exclusively high-quality products. When consumer search is costly, an exclusively high-quality equilibrium is not possible. Moreover, markets may become stuck in a low-quality equilibrium when equilibria with better quality are possible. Market inefficiencies are characterized by an under-investment in friends and a market's misallocation of low-quality firms.

Keywords: giant component; inefficiencies; search; Social Networks (search for similar items in EconPapers)
JEL-codes: D83 D85 L15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-soc
Date: 2017-09
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