Social Learning and the Design of New Experience Goods

32 Pages Posted: 12 Nov 2016 Last revised: 14 Nov 2017

See all articles by Pnina Feldman

Pnina Feldman

Questrom School of Business, Boston University

Yiangos Papanastasiou

University of California, Berkeley - Haas School of Business

Ella Segev

Ben-Gurion University of the Negev - Department of IE&M

Date Written: November 13, 2017

Abstract

Consumers often consult the reviews of their peers before deciding whether to purchase a new experience good; however, their initial quality expectations are typically set by the product's observable attributes. This paper focuses on the implications of social learning for a monopolist firm's choice of product design. In our model, the firm's design choice determines the product's ex ante expected quality, and designs associated with (stochastically) higher quality incur higher costs of production. Consumers are forward-looking social learners, and may choose to strategically delay their purchase in anticipation of product reviews. In this setting, we find that the firm's optimal policy differs significantly depending on the level of the ex ante quality uncertainty surrounding the product. In comparison to the case where there is no social learning, we show that (i) when the uncertainty is relatively low, the firm opts for a product of inferior design accompanied by a lower price, while (ii) when the uncertainty is high, the firm chooses a product of superior design accompanied by a higher price; interestingly, we find that the product's expected quality decreases either in the absolute sense (in the former case), or relative to the product's price (in the latter case). We further establish that, contrary to conventional knowledge, social learning can have an ex ante negative impact on the firm's profit, in particular when the consumers are sufficiently forward-looking. Conversely, we find that the presence of social learning tends to be beneficial for the consumers only provided they are sufficiently forward-looking.

Keywords: Bayesian social learning, endogenous product quality, product design, strategic consumer behavior, applied game theory

Suggested Citation

Feldman, Pnina and Papanastasiou, Yiangos and Segev, Ella, Social Learning and the Design of New Experience Goods (November 13, 2017). Available at SSRN: https://ssrn.com/abstract=2868129 or http://dx.doi.org/10.2139/ssrn.2868129

Pnina Feldman (Contact Author)

Questrom School of Business, Boston University ( email )

Boston, MA
United States

HOME PAGE: http://https://www.bu.edu/questrom/faculty-research/faculty-directory/pnina-feldman/

Yiangos Papanastasiou

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Ella Segev

Ben-Gurion University of the Negev - Department of IE&M ( email )

1 Ben-Gurion Blvd
Beer Sheva, 84105
Israel

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
194
Abstract Views
1,119
rank
215,020
PlumX Metrics