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Asymmetric information, word-of-mouth and social networks: from the market for lemons to efficiency

  • NAVARRO, Noemí

I analyze a market where there is a homogeneous good, which quality is chosen, and therefore known, by a single producer. Consumers do not know the quality of the good but they use their acquaintances in order to obtain information about it. Information transmission exhibits decay and consumers assign a common initial willingness-to-pay before information transmission takes place. I deï¬ne an equilibrium concept for this type of situation and characterize the set of resulting equilibria for any possible social network. The main conclusion from this characterization is that, if there is a maximal level of quality (given by technological knowledge) that can be chosen, then, the producer may choose lower levels of quality as the population of consumers is getting more internally connected, due to free-riding on information by consumers when quality levels are low. This “adverse-selection†effect vanishes if consumers are expected to coordinate on the most favorable equilibria for the producer, if there is zero initial willingness-to-pay or if there are no technological constraints.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006002.

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Date of creation: 00 Feb 2006
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Handle: RePEc:cor:louvco:2006002
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  1. Ellison, Glenn & Fudenberg, Drew, 1995. "Word-of-Mouth Communication and Social Learning," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 93-125, February.
  2. Corneo, Giacomo & Jeanne, Olivier, 1999. "Segmented communication and fashionable behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 39(4), pages 371-385, July.
  3. Yann Bramoulle & Rachel Kranton, 2005. "Strategic Experimentation in Networks," NajEcon Working Paper Reviews 784828000000000417, www.najecon.org.
  4. Abhijit Banerjee & Drew Fudenberg, 2010. "Word of Mouth Learning," Levine's Working Paper Archive 723, David K. Levine.
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