Observational Learning and Social-Network Word-of-Mouth: Evidence from Groupon

Abstract

This study explores how herding, social media word-of-mouth (WOM), and their interaction effects drive product sales. While herding helps updating consumers’ beliefs about the product quality, social media WOM can also have an advertising effect. Using a panel data set consisting of about 500 deals from Groupon, we find both herding and Facebook-mediated WOM has a direct impact on sales, whereas Twitter-mediated WOM does not. More importantly, we theorize the interaction effect between herding and social media WOM and show they are complements in driving product sales. To uncover the underlying mechanisms, we find the herding effect is more salient for experience goods than for search goods, but the effect of Facebook-mediated WOM does not significantly differ between the two product categories. The comparison suggests that signaling product quality is the underlying mechanism of herding, while the effect of Facebook-mediated WOM is primarily through advertising, rather than signaling.