Quality provision under referral consumption

Noemí Navarro

No 2008-12, Working Papers from Universidad de Málaga, Department of Economic Theory, Málaga Economic Theory Research Center

Abstract: I analyze incentives for provision of quality in a market for an experience good. There is a single producer who is choosing quality and price taking into account three features. First, consumers do not know the quality of the good before purchasing it but use their acquaintances in order to obtain information about it. Second, consumers assign a common initial willingness-to-pay before information transmission takes place. Third, the social network of acquaintances is known to the producer. I define an equilibrium concept taking the point of view of the producer and characterize the set of resulting equilibria for any possible social network. One implication from this characterization is that, if there is a maximal level of quality (given by technological knowledge) that can be chosen, the producer may choose lower levels of quality as the population of consumers is getting more internally connected. This is due to free-riding of information by consumers when quality levels are low. In addition, I identify necessary and sufficient conditions for a new producer arriving in the market to provide a lower quality level though a higher price than the initial producer.

Keywords: Networks; word-of-mouth information; referral consumption (search for similar items in EconPapers)
JEL-codes: D4 D8 L1 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2008-10
New Economics Papers: this item is included in nep-cta and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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