You Can Lead a Horse to Water: Spatial Learning and Path Dependence in Consumer Search

Cowles Foundation Discussion Paper 2246

65 Pages Posted: 5 Aug 2020

See all articles by Charles Hodgson

Charles Hodgson

Yale University - Department of Economics

Gregory Lewis

Microsoft Corporation - Microsoft Research New England

Date Written: August 5, 2020

Abstract

We develop a model of consumer search with spatial learning in which sampling the payoff of one product causes consumers to update their beliefs about the payoffs of other products that are nearby in attribute space. Spatial learning gives rise to path dependence, as each new search decision depends on past experiences through the updating process. We present evidence of spatial learning in data that records online search for digital cameras. Consumers’ search paths tend to converge to the chosen product in attribute space, and consumers take larger steps away from rarely purchased products. We estimate the structural parameters of the model and show that these patterns can be rationalized by our model, but not by a model without spatial learning. Eliminating spatial learning reduces consumer welfare by 12%: cross-product inferences allow consumers to locate better products in a shorter time. Spatial learning has important implications for the power of search intermediaries. We use simulations to show that consumer-optimal product recommendations are that are most informative about other products.

Keywords: Consumer search, Platforms, Online markets, Industrial organization

JEL Classification: D12, L81, L0

Suggested Citation

Hodgson, Charles and Lewis, Gregory, You Can Lead a Horse to Water: Spatial Learning and Path Dependence in Consumer Search (August 5, 2020). Cowles Foundation Discussion Paper 2246, Available at SSRN: https://ssrn.com/abstract=3667788 or http://dx.doi.org/10.2139/ssrn.3667788

Charles Hodgson (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

Gregory Lewis

Microsoft Corporation - Microsoft Research New England ( email )

One Memorial Drive, 14th Floor
Cambridge, MA 02142
United States

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