Referrals in Search Markets
This paper compares equilibrium outcomes in search markets with and without referrals. Although consumers would benefit from honest referrals, it is not at all clear whether firms would unilaterally provide information about competing offers since such information could encourage a consumer to purchase the product elsewhere. In a model of a horizontally differentiated product and sequential consumer search, we show that valuable referrals can arise as a part of equilibrium: firm will give referrals to consumers whose ideal product is sufficiently far from the firm;s offering. The effect of referrals on the equilibrium prices is examined, and it is found that prices are higher in markets with referrals. Although consumers can be made worse off by the existence of referrals, referrals lead to a Pareto improvement as long as search cost is not too low relative to product heterogeneity. The effects of referral fees and third-party referrals are examined and policy implications are drawn.
|Date of creation:||Jul 2005|
|Date of revision:|
|Contact details of provider:|| Web page: http://economics.emory.edu/home/journals/|
More information through EDIRC
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.:
- 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.
- 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.
- 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.
- 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.
- Konishi, Hideo, 2005.
"Concentration of competing retail stores,"
Journal of Urban Economics,
Elsevier, vol. 58(3), pages 488-512, November.
- Stiglitz, J E, 1979. "Equilibrium in Product Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 69(2), pages 339-45, May.
- Asher Wolinsky, 1986. "True Monopolistic Competition as a Result of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 493-511.
- 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.
- 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.
- Simon P. Anderson & Regis Renault, 1997. "Consumer Information and Firm Pricing: Negative Externalities from Improved Information," Virginia Economics Online Papers 338, University of Virginia, Department of Economics.
- Asher Wolinsky, 1984. "Product Differentiation with Imperfect Information," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 53-61.
- Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
- Birger Wernerfelt, 1994. "Selling Formats for Search Goods," Marketing Science, INFORMS, vol. 13(3), pages 298-309.
When requesting a correction, please mention this item's handle: RePEc:emo:wp2003:0521. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sue Mialon)
If references are entirely missing, you can add them using this form.