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.