Referrals in Search Markets

45 Pages Posted: 18 Aug 2005 Last revised: 27 Jul 2010

Date Written: February 6, 2006

Abstract

This paper compares the equilibrium outcomes in search markets with and without referrals. Although it seems clear that consumers would benefit from referrals, it is not at all clear whether firms would unilaterally provide information about competing offers since such information could encourage consumers to purchase the product elsewhere. In a model of a horizontally differentiated product and sequential consumer search, we show that valuable referrals can arise in the equilibrium: a firm will give referrals to consumers whose ideal product is sufficiently far from the firm's offering. It is found that the equilibrium prices are higher in markets with referrals. Although referrals can make consumers worse off, referrals lead to a Pareto improvement as long as the search cost is not too low relative to product heterogeneity. Similar results are obtained in the presence of referral fees and in the case where firms can price-discriminate among consumers and consumers can misrepresent their tastes.

Keywords: horizontal referrals, consumer search, information, matching, referral fees

JEL Classification: C7, D4, D8, L1

Suggested Citation

Arbatskaya, Maria and Konishi, Hideo, Referrals in Search Markets (February 6, 2006). Available at SSRN: https://ssrn.com/abstract=782336 or http://dx.doi.org/10.2139/ssrn.782336

Hideo Konishi

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-1209 (Phone)
617-552-2308 (Fax)

No contact information is available for Maria Arbatskaya

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