Word-of-Mouth Communication and Community Enforcement

We study community enforcement in a private information, random match- ing setting, where buyers privately "network" for information and sellers have a short term incentive to supply low quality. We also show that high quality can be sold in a sequential equilibrium with population M even when each buyer periodically interacts with only N*(M) players where 0 < lim M->infinite (N^*2)/M < infinite: We show that when networking is costly and M is large, low quality is supplied with positive probability in any Nash equilibrium. For this case, we characterize conditions for a sequential equilibrium in which both high and low quality are supplied.

Download Paper

Paper Number
96-02
Year
1996