Inducing Exploration in Service Platforms

Inducing Exploration in Service Platforms

By Kostas Bimpikis, Yiangos Papanastasiou
May 22,2018Working Paper No. 3676

Crowd-sourced content in the form of online product reviews or recommendations is an integral feature of most Internet-based service platforms and marketplaces, including Yelp, TripAdvisor, Netflix, and Amazon. Customers may find such information useful when deciding between potential alternatives; at the same time, the process of generating such content is mainly driven by the customers’ decisions themselves. In other words, the service platform or marketplace “explores” the set of available options through its customers’ decisions, while they “exploit” the information they obtain from the platform about past experiences to determine whether and what to purchase. Unlike the extensive work on the trade-off between exploration and exploitation in the context of multi-armed bandits, the canonical framework we discuss in this chapter involves a principal that explores a set of options through the actions of self-interested agents. In this framework, the incentives of the principal and the agents towards exploration are misaligned, but the former can potentially incentivize the actions of the latter by appropriately designing a payment scheme or an information provision policy.