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Peer Influence in Network Markets: An Empirical Investigation

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  • Jörn H. Block
  • Philipp Köllinger

Abstract

We analyze the effect of peer influence on the diffusion of an innovative network good. We argue that the adopters of a network good have an incentive to convince others to purchase the same product because their utility depends on the number of other users. This peer-effect influences individuals’ adoption decisions alongside the more familiar installed-base-effect, based on the individual’s own insight that a larger number of installed units increases his/her benefit of adopting. We test empirically which effect dominates with Instant Messaging, an innovative network good. We arrive at surprising results with far-reaching implications for research and management. The diffusion of Instant Messaging was to a large extent driven by the peer-effect, but the installed base-effect seemed to play no role. We perform our estimation with a discrete time hazard rate model that controls for unobserved heterogeneity.

Suggested Citation

  • Jörn H. Block & Philipp Köllinger, 2007. "Peer Influence in Network Markets: An Empirical Investigation," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 59(4), pages 364-386, October.
  • Handle: RePEc:sbr:abstra:v:59:y:2007:i:4:p:364-386
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    References listed on IDEAS

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    1. Childers, Terry L & Rao, Akshay R, 1992. " The Influence of Familial and Peer-Based Reference Groups on Consumer Decisions," Journal of Consumer Research, Oxford University Press, vol. 19(2), pages 198-211, September.
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    3. Armin Falk & Andrea Ichino, 2006. "Clean Evidence on Peer Effects," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 39-58, January.
    4. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
    5. Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
    6. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-841, August.
    7. Pechmann, Cornelia & Knight, Susan J, 2002. " An Experimental Investigation of the Joint Effects of Advertising and Peers on Adolescents' Beliefs and Intentions about Cigarette Consumption," Journal of Consumer Research, Oxford University Press, vol. 29(1), pages 5-19, June.
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    Cited by:

    1. Xiong, Hang & Payne, Diane & Kinsella, Stephen, 2016. "Peer effects in the diffusion of innovations: Theory and simulation," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 63(C), pages 1-13.

    More about this item

    Keywords

    Hazard Rate Model; Innovation Diffusion; Instant Messaging; Network Markets; Peer Influence;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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