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Referrals in search markets

  • Arbatskaya, Maria
  • Konishi, Hideo

This 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 sufficiently far away from the firm's offering. We allow firms to price-discriminate among consumers, and consumers to misrepresent their tastes. We found that the equilibrium profits tend to be higher in markets with referrals than in markets without. Consumers tend to be better off 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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Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 30 (2012)
Issue (Month): 1 ()
Pages: 89-101

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Handle: RePEc:eee:indorg:v:30:y:2012:i:1:p:89-101
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505551

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  1. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  2. Wolinsky, Asher, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 493-511, August.
  3. Stephen J. Spurr, 1990. "The Impact of Advertising and Other Factors on Referral Practices, with Special Reference to Lawyers," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 235-246, Summer.
  4. Anderson, Simon P & Renault, Regis, 2000. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(3), pages 721-42, August.
  5. Mark V. Pauly, 1979. "The Ethics and Economics of Kickbacks and Fee Splitting," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 344-352, Spring.
  6. Colwell, Peter F & Kahn, Charles M, 2001. "The Economic Functions of Referrals and Referral Fees," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 267-96, November.
  7. Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 69(2), pages 339-45, May.
  8. Wolinsky, Asher, 1984. "Product Differentiation with Imperfect Information," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 53-61, January.
  9. Janssen, Maarten C.W. & Moraga-Gonzalez, Jose Luis & Wildenbeest, Matthijs R., 2005. "Truly costly sequential search and oligopolistic pricing," International Journal of Industrial Organization, Elsevier, vol. 23(5-6), pages 451-466, June.
  10. Hideo Konishi, 1999. "Concentration of Competing Retail Stores," Boston College Working Papers in Economics 447, Boston College Department of Economics.
  11. Birger Wernerfelt, 1994. "Selling Formats for Search Goods," Marketing Science, INFORMS, vol. 13(3), pages 298-309.
  12. Asher Wolinsky, 1983. "Retail Trade Concentration Due to Consumers' Imperfect Information," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 275-282, Spring.
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