The Effect of Social Information on Demand in Quality Competition

34 Pages Posted: 26 Jul 2018

See all articles by Andrew M. Davis

Andrew M. Davis

Cornell University - Samuel Curtis Johnson Graduate School of Management

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management

Dayoung Kim

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: March 3, 2018

Abstract

We investigate the impact of different types of social information on the demand characteristics of firms competing through service quality. We first develop a hidden Markov chain model of social and own learning for a consumer's choice to visit a particular firm, and use it to generate behavioral hypotheses around both consumers' decisions and firms' corresponding demand characteristics: market share, demand uncertainty, and rate of convergence. We then conduct a controlled human-subject experiment where a consumer chooses to visit one of two firms, each with unknown service quality. A consumer may have access to (1) no social information, (2) share-based social information which details the percentage of people that visited each firm, or (3) quality-based social information which illustrates the percentage of people that received a satisfactory experience from each firm. Our results suggest that different types of social information have different effects on firms' demand. One key result is that promoting quality-based social information leads to a significantly higher market share, lower demand variability, and faster rate of convergence, for a firm with significantly better service quality, whereas share-based social information provides almost no benefit to such a firm. A second important insight is that, when the higher quality firm has only a marginal advantage over the other firm, promoting quality-based information can actually lead to a decrease in its market share, and therefore benefit the lower-quality firm.

Keywords: social information, behavioral operations management, service competition, online retail

Suggested Citation

Davis, Andrew M. and Gaur, Vishal and Kim, Dayoung, The Effect of Social Information on Demand in Quality Competition (March 3, 2018). Available at SSRN: https://ssrn.com/abstract=3208758 or http://dx.doi.org/10.2139/ssrn.3208758

Andrew M. Davis (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Vishal Gaur

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Gaur/

Dayoung Kim

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

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