Bayesian social learning with consumer reviews

We study a market of heterogeneous customers who rationally learn the mean quality of an offered product by observing the reviews of customers who purchased the product earlier in time. The seller, who is equally uniformed about the quality, prices dynamically to maximize her revenue. We find that social learning is successful|agents eventually learning the mean quality of the product. This result holds for an information structure when the sequence of past re- views and prices is observed, and, under some assumptions, even when only aggregate reviews are observed. The latter result hinges on the observation that earlier reviews are more inuential than later one. In addition, we find that under general conditions the seller benefits from social learning ex ante|before knowing the quality of her product. Finally, we draw conclusions on the sellers pricing problem when accounting for social learning. Under some assumptions, we find that lowering the price speeds social learning, in contrast with earlier results on social learning from privately observed signals.