Bayesian Social Learning from Consumer Reviews

28 Pages Posted: 13 Jul 2013 Last revised: 2 Jan 2018

Bar Ifrach

Airbnb

Costis Maglaras

Columbia Business School - Decision Risk and Operations

Marco Scarsini

LUISS, Dipartimento di Economia e Finanza

Anna Zseleva

Higher School of Economics

Date Written: December 28, 2017

Abstract

Motivated by the proliferation of user-generated product-review information and its widespread use, this note studies a market where consumers are heterogeneous in terms of their willingness-to-pay for a new product. Each consumer observes the binary reviews (like or dislike) of consumers who purchased the product in the past and uses Bayesian updating to infer the product quality. We show that the learning process is successful as long as the price is not prohibitive and therefore at least some consumers, with sufficiently high idiosyncratic willingness-to-pay, will purchase the product irrespective of their posterior quality estimate. We examine some structural properties of the dynamics of the posterior beliefs. Finally, we study the seller's pricing problem, and we show that, if the set of possible prices is finite, then a stationary optimal pricing policy exists. If putting one item on the market involves a constant cost, then under this optimal policy, learning fails with positive probability.

Keywords: social learning, online reviews

JEL Classification: D49, D83

Suggested Citation

Ifrach, Bar and Maglaras, Costis and Scarsini, Marco and Zseleva, Anna, Bayesian Social Learning from Consumer Reviews (December 28, 2017). Available at SSRN: https://ssrn.com/abstract=2293158 or http://dx.doi.org/10.2139/ssrn.2293158

Bar Ifrach

Airbnb ( email )

888 Brannan St
San Francisco, CA 94103
United States

Costis Maglaras

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

Marco Scarsini (Contact Author)

LUISS, Dipartimento di Economia e Finanza ( email )

Viale Romania 32
Rome, RM 00197
Italy

Anna Zseleva

Higher School of Economics ( email )

Soyza Pechatnikov str., 15
St. Petersburg, 190068
Russia

HOME PAGE: http://annazseleva.com/

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