Welfare-improving cascades and the effect of noisy reviews

Nick Arnosti, Daniel Russo

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

We study a setting in which firms produce items whose quality is ex-ante unobservable, but learned by customers over time. Firms take customer learning into account when making production decisions. We focus on the effect that the review process has on product quality. Specifically, we compare equilibrium quality levels in the setting described above to the quality that would be produced if customers could observe item quality directly. We find that in many cases, customers are better off when relying on reviews, i.e. better off in the world where they have less information. The idea behind our result is that the risk of losing future profits due to bad initial reviews may drive firms to produce an exceptional product. This intuitive insight contrasts sharply with much of the previous academic literature on the subject.

Original languageEnglish (US)
Title of host publicationWeb and Internet Economics - 9th International Conference, WINE 2013, Proceedings
Pages405-420
Number of pages16
DOIs
StatePublished - Dec 1 2013
Event9th International Conference on Web and Internet Economics, WINE 2013 - Cambridge, MA, United States
Duration: Dec 11 2013Dec 14 2013

Publication series

NameLecture Notes in Computer Science (including subseries Lecture Notes in Artificial Intelligence and Lecture Notes in Bioinformatics)
Volume8289 LNCS
ISSN (Print)0302-9743
ISSN (Electronic)1611-3349

Other

Other9th International Conference on Web and Internet Economics, WINE 2013
CountryUnited States
CityCambridge, MA
Period12/11/1312/14/13

ASJC Scopus subject areas

  • Theoretical Computer Science
  • Computer Science(all)

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