Social Learning and the Gains of Experimentation: The Case of Airbnb

Abstract

In most digital markets consumers undoubtedly benefit from product reviews which enable them to discern a product’s quality. We argue that these benefits are too low because the provision of reviews suffers from a public goods dilemma. Consumers making one-off purchases do not internalize the informational value of their reviews on future consumers. Product qualities are then uncovered at an inefficiently low speed. As a direct consequence of this, too few firms enter and remain in the market. To test this idea we estimate a dynamic structural model of the market for Airbnb accommodation in Manhattan, NY, from 2014 to 2019. We use our estimates to compute the welfare effect of a counterfactual discount on the price of new Airbnb listings. We find a substantial welfare increase in response to the subsidy, which is mostly due to a higher number of Airbnb listings.

Regina Seibel
Regina Seibel
PhD candidate in Economics

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