Congested Observational Learning

Eyster, E, Galeotti, A, Kartik, N and Rabin, M (2014) Congested Observational Learning. Games and Economic Behavior, 87. pp. 519-538. ISSN 0899-8256

Abstract

We study observational learning in environments with congestion costs: an agent’s payoff from choosing an action decreases as more predecessors choose that action. Herds cannot occur
if congestion on every action can get so large that an agent prefers a different action regardless of his beliefs about the state. To the extent that switching away from the more popular action
reveals private information, it improves learning. The absence of herding does not guarantee complete (asymptotic) learning, however, as information cascades can occur through perpetual
but uninformative switching between actions. We provide conditions on congestion costs that
guarantee complete learning and conditions that guarantee bounded learning. Learning can
be virtually complete even if each agent has only an infinitesimal effect on congestion costs.
We apply our results to markets where congestion costs arise through responsive pricing and
to queuing problems where agents dislike waiting for service.