IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/12326.html
   My bibliography  Save this paper

Word of Mouth Communication and Search

Author

Listed:
  • Zenou, Yves
  • Campbell, Arthur
  • Leister, Matthew

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.

Suggested Citation

  • Zenou, Yves & Campbell, Arthur & Leister, Matthew, 2017. "Word of Mouth Communication and Search," CEPR Discussion Papers 12326, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12326
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP12326
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bramoulle, Yann & Galeotti, Andrea & Rogers, Brian (ed.), 2016. "The Oxford Handbook of the Economics of Networks," OUP Catalogue, Oxford University Press, number 9780199948277.
    2. Leduc, Matt V. & Jackson, Matthew O. & Johari, Ramesh, 2017. "Pricing and referrals in diffusion on networks," Games and Economic Behavior, Elsevier, vol. 104(C), pages 568-594.
    3. Schmalensee, Richard, 1978. "A Model of Advertising and Product Quality," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 485-503, June.
    4. Ying‐Ju Chen & Yves Zenou & Junjie Zhou, 2018. "Competitive pricing strategies in social networks," RAND Journal of Economics, RAND Corporation, vol. 49(3), pages 672-705, September.
    5. Manolis Galenianos & Rosalie Liccardo Pacula & Nicola Persico, 2012. "A Search-Theoretic Model of the Retail Market for Illicit Drugs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 1239-1269.
    6. Kyle Bagwell & Garey Ramey, 1988. "Advertising and Limit Pricing," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 59-71, Spring.
    7. Ashenfelter, Orley, 2010. "Predicting the Quality and Prices of Bordeaux Wine," Journal of Wine Economics, Cambridge University Press, vol. 5(1), pages 40-52, April.
    8. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
    9. Yann Bramoullé & Andrea Galeotti & Brian Rogers, 2016. "The Oxford Handbook of the Economics of Networks," Post-Print hal-01447842, HAL.
    10. Timothy G. Conley & Christopher R. Udry, 2010. "Learning about a New Technology: Pineapple in Ghana," American Economic Review, American Economic Association, vol. 100(1), pages 35-69, March.
    11. Douglas Gale & Robert W. Rosenthal, 1994. "Price and Quality Cycles for Experience Goods," RAND Journal of Economics, The RAND Corporation, vol. 25(4), pages 590-607, Winter.
    12. Matthew O. Jackson, 2014. "Networks in the Understanding of Economic Behaviors," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 3-22, Fall.
    13. Arthur Campbell & Dina Mayzlin & Jiwoong Shin, 2017. "Managing buzz," RAND Journal of Economics, RAND Corporation, vol. 48(1), pages 203-229, March.
    14. Foster, Andrew D & Rosenzweig, Mark R, 1995. "Learning by Doing and Learning from Others: Human Capital and Technical Change in Agriculture," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1176-1209, December.
    15. Manolis Galenianos & Alessandro Gavazza, 2017. "A Structural Model of the Retail Market for Illicit Drugs," American Economic Review, American Economic Association, vol. 107(3), pages 858-896, March.
    16. Arthur Campbell, 2019. "Social learning with differentiated products," RAND Journal of Economics, RAND Corporation, vol. 50(1), pages 226-248, March.
    17. Carl Shapiro, 1982. "Consumer Information, Product Quality, and Seller Reputation," Bell Journal of Economics, The RAND Corporation, vol. 13(1), pages 20-35, Spring.
    18. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    19. Bloch, Francis & Quérou, Nicolas, 2013. "Pricing in social networks," Games and Economic Behavior, Elsevier, vol. 80(C), pages 243-261.
    20. Baojun Jiang & Bicheng Yang, 2019. "Quality and Pricing Decisions in a Market with Consumer Information Sharing," Management Science, INFORMS, vol. 65(1), pages 272-285, January.
    21. Matthew O. Jackson & Brian W. Rogers & Yves Zenou, 2017. "The Economic Consequences of Social-Network Structure," Journal of Economic Literature, American Economic Association, vol. 55(1), pages 49-95, March.
    22. Ozan Candogan & Kostas Bimpikis & Asuman Ozdaglar, 2012. "Optimal Pricing in Networks with Externalities," Operations Research, INFORMS, vol. 60(4), pages 883-905, August.
    23. Jackson, Matthew O. & Zenou, Yves, 2015. "Games on Networks," Handbook of Game Theory with Economic Applications,, Elsevier.
    24. Yann Bramoullé & Andrea Galeotti & Brian Rogers, 2016. "The Oxford Handbook of the Economics of Networks," Post-Print hal-03572533, HAL.
    25. Arthur Campbell, 2013. "Word-of-Mouth Communication and Percolation in Social Networks," American Economic Review, American Economic Association, vol. 103(6), pages 2466-2498, October.
    26. Rafael Rob & Arthur Fishman, 2005. "Is Bigger Better? Customer Base Expansion through Word-of-Mouth Reputation," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1146-1175, October.
    27. Francis Bloch, 2016. "Targeting and pricing in social networks," Post-Print hal-01309549, HAL.
    28. Banerjee, Abhijit & Fudenberg, Drew, 2004. "Word-of-mouth learning," Games and Economic Behavior, Elsevier, vol. 46(1), pages 1-22, January.
    29. David Godes, 2017. "Product Policy in Markets with Word-of-Mouth Communication," Management Science, INFORMS, vol. 63(1), pages 267-278, January.
    30. Matthew O. Jackson, 2019. "The Friendship Paradox and Systematic Biases in Perceptions and Social Norms," Journal of Political Economy, University of Chicago Press, vol. 127(2), pages 777-818.
    31. Manolis Galenianos & Alessandro Gavazza, 2017. "A Structural Model of the Retail Market for Illicit Drugs," American Economic Review, American Economic Association, vol. 107(3), pages 858-896, March.
    32. Andrea Galeotti & Sanjeev Goyal, 2009. "Influencing the influencers: a theory of strategic diffusion," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 509-532, September.
    33. Ryan C. McDevitt, 2011. "Names and Reputations: An Empirical Analysis," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 193-209, August.
    34. Itay P. Fainmesser & Andrea Galeotti, 2020. "Pricing Network Effects: Competition," American Economic Journal: Microeconomics, American Economic Association, vol. 12(3), pages 1-32, August.
    35. William P. Rogerson, 1983. "Reputation and Product Quality," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 508-516, Autumn.
    36. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    37. Kostas Bimpikis & Asuman Ozdaglar & Ercan Yildiz, 2016. "Competitive Targeted Advertising Over Networks," Operations Research, INFORMS, vol. 64(3), pages 705-720, June.
    38. Itay P. Fainmesser & Andrea Galeotti, 2016. "Pricing Network Effects," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(1), pages 165-198.
    39. repec:hal:pseose:hal-01013603 is not listed on IDEAS
    40. Cabrales, Antonio & Calvó-Armengol, Antoni & Zenou, Yves, 2011. "Social interactions and spillovers," Games and Economic Behavior, Elsevier, vol. 72(2), pages 339-360, June.
    41. Andrea Galeotti, 2010. "Talking, Searching, And Pricing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(4), pages 1159-1174, November.
    42. Yannis M. Ioannides, 2012. "From Neighborhoods to Nations: The Economics of Social Interactions," Economics Books, Princeton University Press, edition 1, volume 1, number 9892.
    43. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    44. de Martí Beltran, Joan, 2009. "Matthew O. Jackson, Social and Economic Networks , Princeton University Press (2008)," Regional Science and Urban Economics, Elsevier, vol. 39(5), pages 644-645, September.
    45. Wei Xing & Qing Liu & Guangjun Chen, 2018. "Pricing strategies for port competition and cooperation," Maritime Policy & Management, Taylor & Francis Journals, vol. 45(2), pages 260-277, February.
    46. Bagwell, Kyle, 2007. "The Economic Analysis of Advertising," Handbook of Industrial Organization, in: Mark Armstrong & Robert Porter (ed.), Handbook of Industrial Organization, edition 1, volume 3, chapter 28, pages 1701-1844, Elsevier.
    47. Goyal, Sanjeev & Heidari, Hoda & Kearns, Michael, 2019. "Competitive contagion in networks," Games and Economic Behavior, Elsevier, vol. 113(C), pages 58-79.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alexei Parahonyak & Nick Vikander, 2024. "Strategic Use of Product Delays to Shape Word-of-Mouth Communication," Economics Series Working Papers 1032, University of Oxford, Department of Economics.
    2. Atayev, Atabek, 2021. "Truly costly search and word-of-mouth communication," ZEW Discussion Papers 21-090, ZEW - Leibniz Centre for European Economic Research.
    3. Atabek Atayev, 2021. "Truly Costly Search and Word-of-Mouth Communication," Papers 2110.00032, arXiv.org.
    4. Atabek Atayev & Maarten Janssen, 2021. "Information Acquisition and Diffusion in Markets," Papers 2109.15288, arXiv.org.
    5. Atayev, Atabek & Janssen, Maarten C. W., 2021. "Information acquisition and diffusion in markets," ZEW Discussion Papers 21-091, ZEW - Leibniz Centre for European Economic Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Elias Carroni & Paolo Pin & Simone Righi, 2020. "Bring a Friend! Privately or Publicly?," Management Science, INFORMS, vol. 66(5), pages 2269-2290, May.
    2. Jadbabaie, Ali & Kakhbod, Ali, 2019. "Optimal contracting in networks," Journal of Economic Theory, Elsevier, vol. 183(C), pages 1094-1153.
    3. Ushchev, Philip & Zenou, Yves, 2018. "Price competition in product variety networks," Games and Economic Behavior, Elsevier, vol. 110(C), pages 226-247.
    4. Panebianco, Fabrizio & Verdier, Thierry & Zenou, Yves, 2016. "Innovation, Pricing and Targeting in Networks," CEPR Discussion Papers 11398, C.E.P.R. Discussion Papers.
    5. Chen, Ying-Ju & Zenou, Yves & Zhou, Junjie, 2022. "The impact of network topology and market structure on pricing," Journal of Economic Theory, Elsevier, vol. 204(C).
    6. Ushchev, Philip & Zenou, Yves, 2020. "Social norms in networks," Journal of Economic Theory, Elsevier, vol. 185(C).
    7. Matthew O. Jackson & Brian W. Rogers & Yves Zenou, 2016. "Networks: An Economic Perspective," Papers 1608.07901, arXiv.org.
    8. Goyal, S., 2016. "Networks and Markets," Cambridge Working Papers in Economics 1652, Faculty of Economics, University of Cambridge.
    9. Zenou, Yves & Chen, Ying-Ju & Zhou, Junjie, 2020. "Network Topology and Market Structure," CEPR Discussion Papers 14495, C.E.P.R. Discussion Papers.
    10. Andrea Galeotti & Benjamin Golub & Sanjeev Goyal, 2020. "Targeting Interventions in Networks," Econometrica, Econometric Society, vol. 88(6), pages 2445-2471, November.
    11. Foerster, Manuel & Hellmann, Tim & Vega-Redondo, Fernando, 2024. "Strategic use of social media influencer marketing," UC3M Working papers. Economics 43985, Universidad Carlos III de Madrid. Departamento de Economía.
    12. Zenou, Yves & Lindquist, Matthew & Sauermann, Jan, 2015. "Network Effects on Worker Productivity," CEPR Discussion Papers 10928, C.E.P.R. Discussion Papers.
    13. Rusinowska, Agnieszka & Taalaibekova, Akylai, 2019. "Opinion formation and targeting when persuaders have extreme and centrist opinions," Journal of Mathematical Economics, Elsevier, vol. 84(C), pages 9-27.
    14. repec:spo:wpmain:info:hdl:2441/78vacv4udu92eq3fec89svm9uv is not listed on IDEAS
    15. Vincent Boucher & Carlo L. Del Bello & Fabrizio Panebianco & Thierry Verdier & Yves Zenou, 2023. "Education Transmission and Network Formation," Journal of Labor Economics, University of Chicago Press, vol. 41(1), pages 129-173.
    16. repec:hal:spmain:info:hdl:2441/78vacv4udu92eq3fec89svm9uv is not listed on IDEAS
    17. Yang Zhang & Ying-Ju Chen, 2020. "Optimal Nonlinear Pricing in Social Networks Under Asymmetric Network Information," Operations Research, INFORMS, vol. 68(3), pages 818-833, May.
    18. Zenou, Yves & Del Bello, Carlo & Panebianco, Fabrizio & Verdier, Thierry, 2016. "Cultural Transmission and Socialization Spillovers in Education," CEPR Discussion Papers 11419, C.E.P.R. Discussion Papers.
    19. Ashani Amarasinghe & Roland Hodler & Paul A. Raschky & Yves Zenou, 2018. "Spatial Diffusion of Economic Shocks in Networks," CESifo Working Paper Series 7001, CESifo.
    20. Zenou, Yves & Olcina, Gonzalo & Panebianco, Fabrizio, 2017. "Conformism, Social Norms and the Dynamics of Assimilation," CEPR Discussion Papers 12166, C.E.P.R. Discussion Papers.
    21. Zenou, Yves & Bochet, Olivier & Faure, Mathieu & Long, Yan, 2020. "Perceived Competition in Networks," CEPR Discussion Papers 15582, C.E.P.R. Discussion Papers.
    22. Antonio Jiménez-Martínez, 2019. "Discrimination through versioning with advertising in social networks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(3), pages 525-564, April.

    More about this item

    Keywords

    Social Networks; Search; Giant component; Inefficiencies;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:12326. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.