Referrals in Search Markets
AbstractThis paper compares the equilibrium outcomes in search markets with and without referrals. Although it seems clear that consumers would benefit from referrals, it is not at all clear whether firms would unilaterally provide information about competing offers since such information could encourage consumers to purchase the product elsewhere. In a model of a horizontally differentiated product market with sequential consumer search, we show that valuable referrals can arise in the equilibrium: a firm will give referrals to consumers whose ideal product is suffciently far from the firms offering. We allow firms to price-discriminate among consumers, and consumers to misrepresent their tastes. It is found that the equilibrium profits tend to be higher in markets with referrals than in the ones without. Consumers tend to be better o¤ in the presence of referrals when search costs are not too low, and under a certain parameter range, referrals lead to a Pareto improvement.
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Bibliographic InfoPaper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 614.
Date of creation: 27 Jul 2005
Date of revision: 10 May 2011
Publication status: forthcoming, International Journal of Industrial Organization
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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
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More information through EDIRC
horizontal referrals; consumer search; information; matching; broker commission.;
Other versions of this item:
- C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
- D4 - Microeconomics - - Market Structure and Pricing
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-08-13 (All new papers)
- NEP-GTH-2005-08-13 (Game Theory)
- NEP-URE-2005-08-13 (Urban & Real Estate Economics)
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