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Random encounters and information diffusion about product quality
Author(s) -
Gabszewicz Jean J.,
Marini Marco A.,
Zanaj Skerdilajda
Publication year - 2022
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/jems.12503
Subject(s) - duopoly , economics , microeconomics , monopoly , profit (economics) , quality (philosophy) , bertrand competition , globalization , information asymmetry , product (mathematics) , industrial organization , oligopoly , market economy , philosophy , epistemology , geometry , mathematics , cournot competition
This paper explores how social interactions among consumers shape markets. In a two‐country model, consumers meet and exchange information about the quality of the goods. As information spreads, demand evolves, affecting the prices and quantities manufactured by profit‐maximizing firms. We show that market prices with informational frictions reach the duopoly price with full information at the limit. However, this convergence can take different paths depending on the size asymmetry between countries. In particular, when the country producing the low‐quality good is relatively large, the single market does not immediately turn into a duopoly and can be temporarily trapped in a situation of price instability where no Nash equilibrium in pure (but only in mixed) strategies exists and prices can fluctuate between their monopoly and duopoly levels. It follows that the classical price‐reducing effects of international trade may take longer to appear. In view of an intense globalization process, understanding how social meetings affect market outcomes is critical for understanding the performance of international economic integration.