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Welfare in Markets where Consumers Rely on Word of Mouth

Welfare in Markets where Consumers Rely on Word of Mouth
Author:

Nora Szech

links:
Date: 2011

We analyze a market with rational firms knowing the distributions from which their opponents’ qualities are drawn. Firms engage in price competi- tion. Following Spiegler (2006a) we assume that consumers only see the firms’ prices and rely on word of mouth to judge the firms’ different qualities.

We prove equilibrium uniqueness for the special case of complete information on the firms’ side. With this result, we characterize all equilibria of the in- complete information model. Different equilibria generate identical payoffs for the firms, but different welfare results. In the monotone pricing equilibrium, welfare converges to zero in the number of firms.