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 and sequential consumer search, we show that valuable referrals can arise in the equilibrium: a firm will give referrals to consumers whose ideal product is sufficiently far from the firm's offering. It is found that the equilibrium prices are higher in markets with referrals. Although referrals can make consumers worse off, referrals lead to a Pareto improvement as long as the search cost is not too low relative to product heterogeneity. Similar results are obtained in the presence of referral fees and in the case where firms can price-discriminate among consumers and consumers can misrepresent their tastes.
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Bibliographic InfoPaper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 1004.
Date of creation: Jul 2010
Date of revision:
Other versions of this item:
- Maria Arbatskaya & Hideo Konishi, 2005. "Referrals in Search Markets," Boston College Working Papers in Economics 614, Boston College Department of Economics, revised 10 May 2011.
- Maria Arbatskaya & Hideo Konishi, 2005. "Referrals in Search Markets," Emory Economics 0521, Department of Economics, Emory University (Atlanta).
- 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-2010-08-06 (All new papers)
- NEP-COM-2010-08-06 (Industrial Competition)
- NEP-MKT-2010-08-06 (Marketing)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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