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This paper offers an information-based model of social interaction, and analyzes optimal investment and pricing of services that facilitate interaction in a duopoly. Agents have uncertainty over their preferences but are aware that they are correlated with others’, so there exists an incentive to communicate with others in the population. When a firm’s good can be bundled with a coordination mechanism for its consumers, its value is endogenously determined due to a consumption externality. Although this mechanism increases total surplus, it is underprovided and consumer surplus decreases.


Published as Hsiaw, Alice, 2014. "Learning tastes through social interaction," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PA), pages 64-85.

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