Bayesian Social Learning from Consumer Reviews

Abstract

When buying a new product online, potential consumers often read online reviews to get an understanding of the quality of the product, and then they decide whether to make a purchase. In turn, people who purchase the product submit reviews to the aggregator site, thus adding new information over time. This paper is the first to study such a social learning mechanism based on online reviews under the assumption that consumers are Bayesian. It identifies assumptions under which consumers eventually learn the true quality and explores the optimal pricing policy for a seller who participates in such a market.