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| Format: | Preprint |
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2024
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| Subjects: | |
| Online Access: | https://arxiv.org/abs/2406.06929 |
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| _version_ | 1866913175144759296 |
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| author | Baek, Jackie Dinev, Atanas Lykouris, Thodoris |
| author_facet | Baek, Jackie Dinev, Atanas Lykouris, Thodoris |
| contents | We study a model of social learning from reviews where customers are computationally limited and make purchases based on reading only the first few reviews displayed by the platform. Under this limited attention, we establish that the review ordering policy can have a significant impact. In particular, the popular Newest First ordering induces a negative review to persist as the most recent review longer than a positive review. This phenomenon, which we term the Cost of Newest First, can make the long-term revenue unboundedly lower than a counterpart where reviews are exogenously drawn for each customer.
We show that the impact of the Cost of Newest First can be mitigated under dynamic pricing, which allows the price to depend on the set of displayed reviews. Under the optimal dynamic pricing policy, the revenue loss is at most a factor of 2. On the way, we identify a structural property for this optimal dynamic pricing: the prices should ensure that the probability of a purchase is always the same, regardless of the state of reviews. We also consider a setting where product quality evolves over time according to a Markov chain; we find that Newest First better tracks current quality but still leads to lower revenue, highlighting a trade-off between customer belief accuracy and revenue. Finally, numerical simulations confirm the robustness of the Cost of Newest First across several modeling variants. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2406_06929 |
| institution | arXiv |
| publishDate | 2024 |
| record_format | arxiv |
| spellingShingle | Social Learning with Limited Attention: Negative Reviews Persist under Newest First Baek, Jackie Dinev, Atanas Lykouris, Thodoris Computer Science and Game Theory We study a model of social learning from reviews where customers are computationally limited and make purchases based on reading only the first few reviews displayed by the platform. Under this limited attention, we establish that the review ordering policy can have a significant impact. In particular, the popular Newest First ordering induces a negative review to persist as the most recent review longer than a positive review. This phenomenon, which we term the Cost of Newest First, can make the long-term revenue unboundedly lower than a counterpart where reviews are exogenously drawn for each customer. We show that the impact of the Cost of Newest First can be mitigated under dynamic pricing, which allows the price to depend on the set of displayed reviews. Under the optimal dynamic pricing policy, the revenue loss is at most a factor of 2. On the way, we identify a structural property for this optimal dynamic pricing: the prices should ensure that the probability of a purchase is always the same, regardless of the state of reviews. We also consider a setting where product quality evolves over time according to a Markov chain; we find that Newest First better tracks current quality but still leads to lower revenue, highlighting a trade-off between customer belief accuracy and revenue. Finally, numerical simulations confirm the robustness of the Cost of Newest First across several modeling variants. |
| title | Social Learning with Limited Attention: Negative Reviews Persist under Newest First |
| topic | Computer Science and Game Theory |
| url | https://arxiv.org/abs/2406.06929 |