Information Acquisition and Diffusion in Markets

Consumers acquire information through their own search efforts or through word-of-mouth
communication within their social network. Information diffusion leads to free-riding and
less active search. Free-riding consumers also create important positive externalities, however,
as they are more likely to compare prices, imposing competitive pressure on firms.
We show how market prices depend on network characteristics and search cost. For example,
if search cost becomes small, price dispersion disappears, while prices converge to
the monopoly level, with expected prices decreasing for small search cost. Prices are lower
in societies with more connections, while price dispersion remains even in fully connected
societies.

Atayev, Atabek and Maarten Janssen (2024), Information Acquisition and Diffusion in Markets, International Economic Review 65(2) , 729-753