EXPERIENCE‐DEPENDENT INFORMATION DIFFUSION AND PRODUCT QUALITY

In a monopoly market for an experience good the diffusion of product‐quality information may depend on whether or not the information is favorable. To capture this asymmetry, our model uses as its information source a quality survey which suffers from response bias. Consumers may attempt to adjust for bias, but are not required to do so correctly. As a result, quality under perfect information need not be, and usually will not be, higher than quality under imperfect information. In addition, the externality exerted by informed consumers on uninformed consumers may not be the traditional beneficial externality. (JEL L15)