engleski

Quality, Cheating and Word-of-Mouth

We apply evolutionary game theory with the replicator dynamics to study the interrelation between the consumer communication on the one hand, and the producer quality choice and its disclosure to the consumers on the other. There is an information asymmetry because the consumers usually do not observe the exact quality before the purchase, but they know the expected quality. Heterogeneous producers do not interact directly, but they affect the payoffs of each other through the market price. We find an interior evolutionary unstable fraction of the high-quality producers, which divides the basins of attraction of two exterior evolutionary stable states, one with high-quality producers only, and the other with low-quality producers only. Larger consumer communication increases the fraction of the initial states which converge to the high-quality equilibrium. An increase in the fraction of the dishonest producers has the opposite effect. A population where both honest and dishonest producers co-exist is evolutionary stable, while homogeneous populations with exclusively honest or dishonest producers are unstable. The reason is that an increase in the fraction of dishonest producers decreases ’the reputation’, and consequently the price, of the high-quality good, which decreases the payoff of the dishonest producer. However, consumer communication and the increase in the low quality may decrease, while an increase in the high quality and in the share of the high-quality producers increases the evolutionary stable fraction of the dishonest producers.

Word-of-mouth; Replicator dynamics; Quality; Cheating

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