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Social Networks and Choice Set Formation in Discrete Choice Models

Author

Listed:
  • Bruno Wichmann

    () (Department of Resource Economics and Environmental Sociology, University of Alberta, 214F Agriculture/Forestry Ctr, Edmonton, AB, Canada T6G 2P5)

  • Minjie Chen

    () (Department of Resource Economics and Environmental Sociology, University of Alberta, 214F Agriculture/Forestry Ctr, Edmonton, AB, Canada T6G 2P5)

  • Wiktor Adamowicz

    () (Department of Resource Economics and Environmental Sociology, University of Alberta, 214F Agriculture/Forestry Ctr, Edmonton, AB, Canada T6G 2P5)

Abstract

The discrete choice literature has evolved from the analysis of a choice of a single item from a fixed choice set to the incorporation of a vast array of more complex representations of preferences and choice set formation processes into choice models. Modern discrete choice models include rich specifications of heterogeneity, multi-stage processing for choice set determination, dynamics, and other elements. However, discrete choice models still largely represent socially isolated choice processes —individuals are not affected by the preferences of choices of other individuals. There is a developing literature on the impact of social networks on preferences or the utility function in a random utility model but little examination of such processes for choice set formation. There is also emerging evidence in the marketplace of the influence of friends on choice sets and choices. In this paper we develop discrete choice models that incorporate formal social network structures into the choice set formation process in a two-stage random utility framework. We assess models where peers may affect not only the alternatives that individuals consider or include in their choice sets, but also consumption choices. We explore the properties of our models and evaluate the extent of “errors” in assessment of preferences, economic welfare measures and market shares if network effects are present, but are not accounted for in the econometric model. Our results shed light on the importance of the evaluation of peer or network effects on inclusion/exclusion of alternatives in a random utility choice framework.

Suggested Citation

  • Bruno Wichmann & Minjie Chen & Wiktor Adamowicz, 2016. "Social Networks and Choice Set Formation in Discrete Choice Models," Econometrics, MDPI, Open Access Journal, vol. 4(4), pages 1-26, October.
  • Handle: RePEc:gam:jecnmx:v:4:y:2016:i:4:p:42-:d:81531
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    independent availability logit; social networks; choice set formation; welfare; market shares;

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C - Mathematical and Quantitative Methods
    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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