Consumers Networks and Search Equilibria

Abstract

We explore the effect of local information sharing among consumers on market functioning. Consumers are embedded in a consumers network, they may costly search non-sequentially for price quotations and the information gathered are non-excludable along direct links. We first show that when search costs are low consumers randomize between searching for one price and two price quotations (high search intensity equilibrium). Otherwise, consumers randomize between searching for one price and not searching at all (low search intensity equilibrium). In both equilibria consumers search less frequently in denser networks. The main result of the paper shows that when search costs are low the expected price and the social welfare increase, while the consumer surplus decreases, as the consumers network becomes denser. These results are reverse when search costs are high.