The Effect of Social Information on Demand in Quality Competition
34 Pages Posted: 26 Jul 2018
Date Written: March 3, 2018
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
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