Competition and Social Learning

Abstract

We study social learning through reviews in a market with horizontally and vertically differentiated firms. Heterogeneous match qualities among consumers give rise to rich belief and buying dynamics. We give a tight characterization of possible limit buying outcomes and resulting welfare implications: inefficiencies arise only from suboptimal horizontal matches because not enough high quality firms are learnt about; by contrast, vertical matches are always optimal. We uncover a fundamental tradeoff between the speed and breadth of learning: faster learning via more precise signals about product qualities lead to insufficient exploration. We show that noisy and asymmetric signals guarantee full learning and restore efficiency although consumers are myopically optimizing and do not internalize the learning externality. We discuss implications for review and platform design.