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Word of Mouth Communication and Search

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  • Zenou, Yves
  • Campbell, Arthur
  • Leister, Matthew

Abstract

In many economic contexts, the most credible source of information about the quality of products is one's friends. In this paper, we develop a word-of-mouth model of search for an experience good where the quality is unknown. We find the characteristics of the social net- work that result in exclusively low quality, a mixture of qualities and exclusively high-quality products. When consumer search is costly, an exclusively high-quality equilibrium is not possible. Moreover, markets may become stuck in a low-quality equilibrium when equilibria with better quality are possible. Market inefficiencies are characterized by an under-investment in friends and a market's misallocation of low-quality firms.

Suggested Citation

  • Zenou, Yves & Campbell, Arthur & Leister, Matthew, 2017. "Word of Mouth Communication and Search," CEPR Discussion Papers 12326, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12326
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    Cited by:

    1. Alexei Parahonyak & Nick Vikander, 2024. "Strategic Use of Product Delays to Shape Word-of-Mouth Communication," Economics Series Working Papers 1032, University of Oxford, Department of Economics.
    2. Atayev, Atabek, 2021. "Truly costly search and word-of-mouth communication," ZEW Discussion Papers 21-090, ZEW - Leibniz Centre for European Economic Research.
    3. Atabek Atayev, 2021. "Truly Costly Search and Word-of-Mouth Communication," Papers 2110.00032, arXiv.org.
    4. Atabek Atayev & Maarten Janssen, 2021. "Information Acquisition and Diffusion in Markets," Papers 2109.15288, arXiv.org.
    5. Atayev, Atabek & Janssen, Maarten C. W., 2021. "Information acquisition and diffusion in markets," ZEW Discussion Papers 21-091, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    Social Networks; Search; Giant component; Inefficiencies;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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