Random Encounters and Information Di§usion about Product Quality

Gabszewicz, Jean and Marini, Marco A. and Zanaj, Skerdilajda (2021): Random Encounters and Information Di§usion about Product Quality.

Abstract

This paper explores how social interactions among consumers shape markets. In a two-country model, consumers meet and exchange information about the quality of the goods. As information spreads, the demands evolve, affecting the prices and quantities manufactured by profit-maximizing firms. We show that market prices with informational frictions reach the duopoly price with full information, at the limit. However, this convergence can take two different paths depending on the size asymmetry between countries. In particular, when countries are of very different sizes, the single market does not immediately turn into a duopoly and monopoly prices may persist for several periods. Hence, the price-reducing trade effects may take longer to appear. In view of an intense globalization process, understanding how social meetings affect market outcomes is critical for understanding the performance of international economic integration.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumer Encounters, Information Diffusion, Country Size, Product Quality
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty; F - International Economics > F2 - International Factor Movements and International Business; F - International Economics > F2 - International Factor Movements and International Business > F22 - International Migration; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L22 - Firm Organization and Market Structure

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