The Cost of the Cold-Start Problem on Airbnb

Abstract

On platforms with peer-to-peer reviews, new products encounter the so-called “cold- start” problem. Little-known products are bought too rarely and remain little known. This paper studies how policies aimed at mitigating the cold-start problem, specifically by low- ering prices for new products, affect welfare and how much of the welfare effect is due to a change in the speed of social learning. Based on data from Airbnbs located in Manhattan, we estimate a structural model with short-lived consumers and long-lived hosts who make dynamic entry, exit, and pricing decisions. We then simulate a counterfactual reduction in Airbnb’s revenue fee for new listings. While this increases total welfare, we find that it does not accelerate social learning. By contrast, if the cost of the fee reduction is passed on to hosts, faster social learning in itself increases consumer welfare by up to 5% and is the main driver of the total welfare gain.