Product Policy in Markets with Word-of-Mouth Communication

We investigate the equilibrium relationship between product quality and word-of-mouth (WOM) communication. Specifically, we ask whether firms should optimally produce “better” products when consumers are more likely to exchange information. The critical moderating factor in our model is the nature of the communication and what its primary impact is. We first look at WOM that expands awareness of a product. We show that quality may either...