Information acquisition and diffusion in markets

Maarten Janssen, Atabek Atayev

Consumers can acquire information through their own search efforts or through their socialnetwork. 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 animportant positive effect, however, in that consumers that do not actively search themselves aremore 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. Forexample, if the search cost becomes small, price dispersion disappears, while the price levelconverges to the monopoly level, implying that expected prices are decreasing for small enoughsearch cost. More connected societies have lower market prices, while price dispersion remainseven in fully connected societies.

Department of Economics
No. of pages
Publication date
Austrian Fields of Science 2012
502021 Microeconomics
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