Consumer Networks and Firm Reputation: A First Experimental Investigation

4 Conclusions

In this note we have shown that efficiency in a market for experience goods increases in the
density of an underlying consumer network that allows consumers to exchange information
about their private experience with different sellers. To the best of our knowledge this is the
first study that provides such controlled experimental evidence in economics. We find that
market performance is increasing in network density. While demand peaks with partial
networks (where consumers just learn their own outcomes and those from one neighbor),
average quality reaches its peak only in the full network where everybody has access to the
entire history of all sellers. While such a full network represents a rather ideal case (perhaps
only of real-world relevance on online trading platforms) it does help to benchmark the other
outcomes. A partial consumer network with just 33% of the full network’s density reaches
80% of the ideal’s efficiency. This result highlights the benefits of some minimal social
cohesion. Informal information exchange with just a few neighbors may go a long way.

Our results should also be encouraging for future research on informal information exchange
in networks. There are several interesting avenues of which we want to highlight two. In
larger groups, it would be possible to reduce the network density further. How minimal can
the density become before breakdown occurs? Secondly, what if information from others is
not free, i.e., if links to neighbors need to be created and maintained? Our note suggests that it
could be very exciting to study such endogenous formation of consumer networks in the
4
laboratory.

⁴ For experiments on network formation with exogenous benefit structures see, for example, Falk and Kosfeld
2003 or Kosfeld’s (2004) survey. In a setup like ours the gains of forming a link would endogenously depend on
firms’ reactions to the additional information flow.

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