Working Paper: CEPR ID: DP14036
Authors: Maarten Janssen; Atabek Atayev
Abstract: Consumers can acquire information through their own search efforts or through their social network. Information diffusion via word-of-mouth communication leads to some consumers free-riding on their "friends" and less information acquisition via active search. Free-riding also has an important positive effect, however, in that consumers that do not actively search themselves are more likely to be able to compare prices before purchase, imposing competitive pressure on firms. We show how market prices depend on the characteristics of the network and on search cost. For example, if the search cost becomes small, price dispersion disappears, while the price level converges to the monopoly level, implying that expected prices are decreasing for small enough search cost. More connected societies have lower market prices, while price dispersion remains even in fully connected societies.
Keywords: consumer search; word-of-mouth communication; social networks
JEL Codes: D43; D83; D85
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Information diffusion through WOM (D16) | Free-riding on friends (H40) |
| Free-riding on friends (H40) | Individual search efforts (J65) |
| Individual search efforts (J65) | Market competition (L13) |
| Search costs (G19) | Market prices (P22) |
| Search costs (G19) | Price dispersion (L11) |
| Network characteristics (D85) | Market prices (P22) |
| Connected societies (Z13) | Market prices (P22) |
| Search costs (G19) | Active searchers (D83) |
| Active searchers (D83) | Price convergence (D41) |