The Effect of Social Information on Demand in Quality Competition

Abstract

We investigate how different types of social information affect the demand characteristics of firms competing through service quality. We first generate behavioral hypotheses around both consumers' learning behavior and firms' corresponding demand characteristics: market share, demand uncertainty, and rate of convergence. We then conduct a controlled human-subject experiment where a consumer chooses to visit one of two firms, each with unknown service quality, in a repeated interaction and is exposed to different information treatments from a social network: (1) no social information, (2) share-based social information which details the percentage of people that visited each firm, (3) quality-based social information which illustrates the percentage of people that received a satisfactory experience from each firm, or (4) full social information which contains both share-based and quality-based social information. A key insight from our study is that different types of social information have different effects on firms' demand. First, promoting quality-based social information leads to a significantly higher market share, lower demand variability, and faster rate of convergence, for a firm with significantly better service quality. Second, when the higher quality firm has only a marginal advantage over the other firm, promoting only share-based information leads to higher market share and lower demand variability. A third important result is that providing only one type of social information can actually be more helpful to the higher quality firm than providing full social information.