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Recommended for You: The Effect of Word of Mouth on Sales Concentration

29 Pages Posted: 29 Oct 2007 Last revised: 2 Mar 2015

Andres Hervas-Drane

City University London - Sir John Cass Business School

Date Written: February 23, 2015

Abstract

I examine the role of word of mouth in consumer's product discovery process and its implications for the firm. A monopolist supplies an assortment of horizontally differentiated products and consumers search for a product that matches their taste by sampling products from the assortment or by seeking product recommendations from other consumers. I analyze the underlying consumer interactions that lead to the emergence of word of mouth, examine the optimal pricing and assortment strategy of the firm, and explain the impact of word of mouth on the concentration of sales within the assortment. The model provides a rationale for the long tail phenomenon, explains recent empirical findings in online retail, and is well suited for product categories such as music, film, books, and video game entertainment.

Keywords: Search, Product Discovery, Product Recommendations, Recommender Systems, Long Tail

JEL Classification: D42, D83, L15, M31

Suggested Citation

Hervas-Drane, Andres, Recommended for You: The Effect of Word of Mouth on Sales Concentration (February 23, 2015). NET Institute Working Paper No. 07-41. Available at SSRN: https://ssrn.com/abstract=1025123 or http://dx.doi.org/10.2139/ssrn.1025123

Andres Hervas-Drane (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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