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Consumers Networks and Search Equilibria

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  • Andrea Galeotti

    ()
    (Faculty of Economics, Erasmus Universiteit Rotterdam)

Abstract

I examine a search model a la' Burdett and Judd (1983). Consumers are embedded in a consumers network, they may costly search for price quotations and the information gathered are non-excludable along direct links. This allows me to explore the effect of endogenous consumers externalities on market functioning. I first show that when search costs are low consumers randomize between searching for one price and two price quotations (high intensity search equilibrium). Otherwise, consumers randomize between searching for one price and not searching at all (low intensity search equilibrium). Second, in both equilibria consumers search less frequently in denser networks. Finally, when search costs are low the expected price and the social welfare increase as the consumers network becomes denser. These results are reverse when search costs are high.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-075/1.

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Date of creation: 08 Jul 2004
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Handle: RePEc:dgr:uvatin:20040075

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Keywords: Networks; Consumers Externalities; Search;

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  1. Bester, H., 1993. "Price Commitment in Search Markets," Papers, Tilburg - Center for Economic Research 9309, Tilburg - Center for Economic Research.
  2. Simon P. Anderson & Regis Renault, 1997. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," Virginia Economics Online Papers 338, University of Virginia, Department of Economics.
  3. Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, Econometric Society, vol. 51(4), pages 955-69, July.
  4. Venkatesh Bala & Sanjeev Goyal, 2000. "A Noncooperative Model of Network Formation," Econometrica, Econometric Society, Econometric Society, vol. 68(5), pages 1181-1230, September.
  5. Goyal, Sanjeev & Joshi, Sumit, 2003. "Networks of collaboration in oligopoly," Games and Economic Behavior, Elsevier, Elsevier, vol. 43(1), pages 57-85, April.
  6. Stahl, Dale O, II, 1989. "Oligopolistic Pricing with Sequential Consumer Search," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 700-712, September.
  7. Rachel E. Kranton & Deborah F. Minehart, 2001. "A Theory of Buyer-Seller Networks," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 485-508, June.
  8. Maarten C.W. Janssen & Jose Luis Moraga, 2000. "Pricing, Consumer Search and the Size of Internet Markets," Tinbergen Institute Discussion Papers, Tinbergen Institute 00-042/1, Tinbergen Institute.
  9. Matthew O. Jackson & Asher Wolinsky, 1995. "A Strategic Model of Social and Economic Networks," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1098R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. MacMinn, Richard D, 1980. "Search and Market Equilibrium," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(2), pages 308-27, April.
  11. Braverman, Avishay, 1980. "Consumer Search and Alternative Market Equilibria," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 47(3), pages 487-502, April.
  12. Antoni Calvó-Armengol & Matthew O. Jackson, 2004. "The Effects of Social Networks on Employment and Inequality," American Economic Review, American Economic Association, American Economic Association, vol. 94(3), pages 426-454, June.
  13. Maarten C. W. Janssen & José Luis Moraga-González, 2004. "Strategic Pricing, Consumer Search and the Number of Firms," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(4), pages 1089-1118, October.
  14. Kenneth Burdett and Melvyn G. Coles, . "Steady State Price Distributions in a Noisy Search Equilibrium," Economics Discussion Papers, University of Essex, Department of Economics 450, University of Essex, Department of Economics.
  15. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, Econometric Society, vol. 53(4), pages 923-44, July.
  16. Stahl, Dale O., 1996. "Oligopolistic pricing with heterogeneous consumer search," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 14(2), pages 243-268.
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Citations

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Cited by:
  1. Andrea Galeotti & Sanjeev Goyal, 2007. "Games of Social Influence," Economics Discussion Papers, University of Essex, Department of Economics 639, University of Essex, Department of Economics.
  2. Itay P. Fainmesser, 2012. "Community Structure and Market Outcomes: A Repeated Games-in-Networks Approach," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 4(1), pages 32-69, February.
  3. Andrea Galeotti & Sanjeev Goyal & Matthew O. Jackson & Fernando Vega-Redondo & Leeat Yariv, 2008. "Network Games," Economics Working Papers, European University Institute ECO2008/07, European University Institute.
    • Andrea Galeotti & Sanjeev Goyal & Matthew O. Jackson & Fernando Vega-Redondo & Leeat Yariv, 2010. "Network Games," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 218-244.
  4. Christian Ghiglino & Sanjeev Goyal, 2010. "Keeping Up with the Neighbors: Social Interaction in a Market Economy," Journal of the European Economic Association, MIT Press, MIT Press, vol. 8(1), pages 90-119, 03.
  5. NAVARRO, Noemí, 2006. "Asymmetric information, word-of-mouth and social networks: from the market for lemons to efficiency," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2006002, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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