Social Learning from Early Buyer Reviews: Implications for New Product Launch

We investigate the implications of social learning on a monopolist firm’s pricing and inventory decisions. In our model, customers who purchase the product early in the selling season report their ex-post opinions of product quality through buyer reviews, while customers remaining in the market observe these reviews before making purchasing decisions. Because customers are heterogeneous in their preferences, inferring product quality from buyer reviews is challenging. We consider two modes of social learning: perfect (Bayesian) and imperfect (motivated by empirical evidence). Our analysis illustrates that, apart from extracting revenue, price influences both the amount of information made available to potential customers, as well as its content, thereby modulating the social learning process. We find that even though learning from buyer reviews is rational for individual customers, aggregate customer surplus typically decreases in the presence of social learning. Consistent with anecdotal evidence, we show that, when social learning is imperfect, the firm may deliberately induce an early supply shortage in order to achieve increased overall product adoption. In addition, we demonstrate that optimal inventory management may allow the firm to approximate dynamic pricing outcomes while charging a fixed price.