Social Learning and the Design of New Experience Goods

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.

Sales Disclosure and Pricing Policies in the Presence of Social Learning

“…In addition, consumers' strategic delay of their consumption in order to wait for early buyers' product reviews can harm firms. Feldman et al [14] presented a new aspect for firms to consider in adapting to consumers' SL behavior. ey suggested that firms consider the impact of SL as early as the product design stage.…”

Competitive Pricing of Innovative Products with Consumers’ Social Learning

“…Several papers have also examined pricing strategies of experience goods with social learning. Feldman, Papanastasiou and Segev [3] studied the interaction between review-based social learning and a monopolist firm's choice of product price and design. Differently from this study, our study concentrated on competitive pricing strategies of innovative goods with social learning.…”

“…Consumers can acquire more information about an innovative product from several sources and evaluate the product better over time [2], such as peer consumer reviews and historical sales on e-commerce websites. The influence of consumer reviews and historical sales on the purchase decisions of potential product buyers has grown dramatically in the last decade, with recent surveys suggesting that up to 69% of consumers will consult peer reviews before determining whether to buy a product [3]. To date, efforts in this area of research have focused on a monopoly's pricing strategy of experience good, or duopoly competition with a consumer learning mechanism driven by Bayesian inference.…”

Rear Visibility and Some Unresolved Problems for Economic Analysis (With Notes on Experience Goods)

“…People obtain experience all the time, and they make decisions accordingly. Word-of-mouth can do a great deal to communicate the value of experience goods; social learning is critical (Feldman et al, 2017). It is also true that producers can adopt innovative approaches to solve the problemas, for example, through free or low-cost trial periods.…”

“…The idea was introduced inNelson (1970). There is now an extensive literature on the topic(Klein, 1998;Bergemann & Välimäki, 2006;Feldman et al, 2017).…”