Recommended for you: The effect of word of mouth on sales concentration

• I incorporate word of mouth (WOM) into a monopoly model with consumer search.
• WOM expands the firm's demand and benefits mainstream consumers the most.
• The firm benefits from increasing WOM efficiency and discounts prices to support it.
• Changes in WOM efficiency can generate a superstars or a long tail effect.
• The long tail effect drives the firm to promote mainstream products.

I examine the role of word of mouth in consumer's product discovery process and its implications for the firm. A monopolist supplies an assortment of horizontally differentiated products and consumers search for a product that matches their taste by sampling products from the assortment or by seeking product recommendations from other consumers. I analyze the underlying consumer interactions that lead to the emergence of word of mouth, examine the optimal pricing and assortment strategy of the firm, and explain the impact of word of mouth on the concentration of sales within the assortment. The model provides a rationale for the long tail phenomenon, explains recent empirical findings in online retail, and is well suited for product categories such as music, film, books, and video game entertainment.