Social Learning, Salience Competition And Herding Behavior

We study the herding behavior in the market when consumers do word-of-mouth communication.We assume there exists a continuum of infinitely lived bounded rational agents in the market.In each period,they have to choose between two goods supplied by two firms.We assume they communicate in the way of sampling finite number of "friends" in the economy and decide by comparing their average payoffs from consuming different goods.Firms enter the market and choose a long-term salience strategy to compete with each other.They aim to increase their own market share by attracting the component's customers in the way of implementing salience level.We study the long run behavior of the market share in this setting.We found that with small scale communication the equilibrium salience level can generate herding behavior.If the firm with better quality enters the market with very low share of the market,we found that under some level of sampling salience competition can generate efficient herding so that every consumer chooses the better good in the long run.We also calculate the socially optimal level of salience and communication.The result shows that the market converges to efficient herding in the long run if the communication is low.The policy implication is:if we want to avoid the long run inefficiency,a conservative policy is to educate consumer to use some level of communication before deciding.In this way the market might not go to efficiency in the long run but will at least keep its diversity.