Information-mediated network effects: network composition and customer benefit in the presence of information asymmetry

Abstract

This article advances a novel information-mediated network effect argument that is particularly relevant in industries where information asymmetry may prevent customers from obtaining full service benefits. The article presents and tests the argument that customers’ access to capital is a function of the network of other customers affiliated with their bank, hence an economic network effect. Co-affiliation in a bank by actors from a credit-seeking firm’s network increases the amount and quality of the information available pertinent to that firm and hence provides the firm with the opportunity to access capital more closely aligned with its true credit-worthiness. Contrary to intuition but in line with economic network theory, the study shows that very low levels of co-affiliation also increase a firm’s credit availability. Such information-mediated network effects is empirically studied in a sample of 613 small and medium-size firms and their bank affiliations. There are significant implications for customers’ choice of banks and major bank policy choice implications associated with segmentation and customer recruitment.