Word of Mouth Communication and Search
Christian Leister () and
Yves Zenou ()
No 12326, CEPR Discussion Papers from C.E.P.R. Discussion Papers
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
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