Multidimensional Observational Learning in Social Networks: Theory and Experimental Evidence

Abstract

The unprecedented growth of social network users in the last decade has resulted in significant increases in the availability of individual-specific information such as holiday pictures, mobile check-ins at restaurants, and information on everyday purchases. Consumers shopping through social network channels are increasingly using this information in making their purchase decisions. We find that social ties impact the magnitude of observational learning. In the case of strangers, the effect of learning is stronger for vertically differentiated products than for horizontally differentiated products; whereas in the case of friends, the effect of learning for vertically differentiated products is similar to that for horizontally differentiated products. Moreover, the type of product impacts the magnitude of observational learning. For horizontally differentiated products, the effect of learning from friends is stronger than that from strangers; whereas for vertically differentiated products, the effect of learning from friends is similar to that from strangers. These findings provide motivation for online retailers to generate alternative strategies for increasing product sales through social networks. For example, online retailers offering horizontally differentiated products have strong incentives to cooperate with social media platforms (e.g., Instagram and Pinterest) in encouraging customers to share their purchase information.