Word‐of‐mouth communication and search

Abstract

AbstractWe develop a word‐of‐mouth search model where information flows from the old to the new generation for an experience good with unknown quality. We study the features of the social network that determine product quality and welfare and characterize the demand‐side (under provision of search effort) and supply‐side (inefficient entry by firms) factors that result in inefficiencies. One striking result is to show that the more connected but also the less‐unequal a friendship network is (in the sense of second order stochastic dominance of the degree distribution), the less can disreputable (low‐quality) firms thrive in equilibrium.