Firm Experimentation and Social Networks


(Preliminary/Work in Progress) Firms may be uncertain as to the ʺoptimalʺ way to operate, so society can benefit from firms experimenting with different modes of operation. However, individual consumers might stop going to a business that gives them poor outcomes. Moreover, if an individual has heard through her social network about bad outcomes from a business, she might decline to ever try the firm. This paper considers this problem, looking at the ways in which the underlying social network influences firms’ incentives to experiment and which networks are socially optimal for experimentation.