Observational Learning and Demand for Search Goods

In many differentiated good markets like music, books, and movies, the choice set of available products,is overwhelmingly,large and growing,as new products,flow into the market,each month.,Consumers,are not aware,or poorly informed,about,many,of the available products. They learn about products,and their preferences for them,from the purchasing,decisions of other consumers,and through,costly search. We use a variant of the sequential search models of Banerjee [2], Bikhchandani, Hirshleifer, and Welch [5] and Smith and,Sorensen [18] to study market,demand,in these kinds of markets. The option to search prior to purchase,leads to different dynamics,and outcomes,than the standard,herding,models.,The results explain both the unpredictability,of sales conditional,on quality and,the inequality of sales across products.,The model,also yields testable predictions regarding the impact of product quality, search costs, and price on the likelihood of a high-quality product ending up with low sales (i.e., a “bad” herd). We validate the model using data from an experimental study by Salganik, Dodds, and Watts [15]. 1 1I ntroduction