Consumer Information Networks

This paper examines the informativeness of consumer information networks and their effect on price competition between firms. Under the proposed information mechanism, consumers share their initial information with the members of their network and as such become better informed. The main result of this paper shows how informative such networks are by characterizing how many different pieces of information a network is likely to contain. This informativeness is crucial for the degree of competition, as consumers comparing more prices induce firms to compete more fiercely. We find that larger networks imply better information transmission, which intensifies competition and decreases all the percentiles of the price distribution. An increase in the number of firms makes networks more informative, and decreases all the percentiles as well. Our results are robust to the introduction of sequential search and network segregation, but an increase in segregation decreases information transmission and increases all percentiles