If you love it I'll probably hate it: local interaction among consumers of information goods

Zakaria Babutsidze

No 2012-24, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: We present a computational model of consumer behavior. Consumers possess expectation-based reference-dependent preferences and are disappointment averse. They interact with each other on static social network. They exchange and update their beliefs about the quality of the product. Individual beliefs are updated only until the individual consumes the product. We discuss non-repetitive, sequential consumer choices. The model generates the oversized e ect of negative consumer sentiment compared to the positive sentiment from the symmetric individual behavior. We demonstrate that word-of-mouth generated through face-to-face communication can interact with advertising in complex ways. In particular we show that both consumers' trust in word-of-mouth and density of the social network are negatively e ecting the returns to product promotion. Finally, the model conforms to the well-known advise for producers to "underpromise and overdeliver".

Date: 2012-10
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:1224

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