Word‐Of‐Mouth Communication and Community Enforcement

Abstract

We study a repeated game where a seller, who has a short-term incentive to supply low quality, is periodically matched with a randomly selected buyer. Buyers observe only the outcomes of their neighbors' games and may receive signals from them. When the buyer population is large, the seller may sell high quality even when each buyer observes her action in any given period with an arbitrarily small probability. When networking among buyers is costly, low quality is always supplied with a positive probability. For this case, we characterize an equilibrium where the seller randomizes between high and low quality.

Availability of Better Data on Communication Networks Can Undermine Community Enforcement

“…This is in precisely the same spirit as the result from Ahn and Suominen (2001), in which high quality trade can be sustained indefinitely as long as there are a sufficiently large number of spectators per transaction. Since the outsider is conditioning on the average neighborhood size here, there is no distinction between spectators chosen at random each period, as in Ahn and Suominen (2001), or fixed but unknown to the outsider, as in the present framework.…”

“…Since the outsider is conditioning on the average neighborhood size here, there is no distinction between spectators chosen at random each period, as in Ahn and Suominen (2001), or fixed but unknown to the outsider, as in the present framework.…”

“…Closest to the model I present below is Ahn and Suominen (2001). Their model has an intermediate assumption on information transmission: a single seller transacts with many buyers in an infinitely repeated game, in which one buyer is matched with the seller in each period and some subset of the remaining buyers are selected to be 'spectators' to the transaction.…”

“…Our local punishment rule, when combined with a strategy profile in which all insiders always choose engage and the outsider always chooses to be honest, comprises the 'unforgiving strategy profile' in Ahn and Suominen (2001). The question that we will focus on is: to what extent does the local punishment rule insulate insiders against being treated dishonestly by the outsider?…”

Organizations and overlapping generations games: Memory, communication, and altruism

“…These two attributes together have important strategic consequences since they imply that an individual's play against an "old" member in another organization will not be "remembered" by the incoming "young" member in the same organization. 1 Consider, for example, how a firm's manager might react to a rival's price fixing proposal, knowing that his reaction will not be observed by the incoming manager of the rival firm. Alternatively, consider how the leader of one political party would react to a proposed powersharing arrangement if the proposal was made by the outgoing leader of the rival party.…”