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Truly costly search and word-of-mouth communication

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  • Atayev, Atabek

Abstract

In markets with search frictions, consumers can acquire information about goods either through costly search or from friends via word-of-mouth (WOM) communication. How do sellers' market power react to a very large increase in the number of consumers' friends with whom they engage in WOM? The answer to the question depends on whether consumers are freely endowed with price information. If acquiring price quotes is costly, equilibrium prices are dispersed and the expected price is higher than the marginal cost of production. This implies that firms retain market power even if price information is disseminated among a very large number of consumers due to technological progress, such as social networking websites.

Suggested Citation

  • Atayev, Atabek, 2021. "Truly costly search and word-of-mouth communication," ZEW Discussion Papers 21-090, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:21090
    as

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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Consumer Search; Word-of-Mouth Communication; Social Networks;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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