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Title: Word of Mouth Communication and Search

Author(s): Arthur Campbell, Matthew Leister and Yves Zenou

Publication Date: September 2017

Keyword(s): giant component, inefficiencies, search and Social Networks

Programme Area(s): Industrial Organization

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.

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Bibliographic Reference

Campbell, A, Leister, M and Zenou, Y. 2017. 'Word of Mouth Communication and Search'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12326