Discussion paper
DP12326 Word of Mouth Communication and Search
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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