Peer influence in network markets: a theoretical and empirical analysis
Network externalities spur the growth of networks and the adoption of network goods in two ways. First, they make it more attractive to join a network the larger its installed base. Second, they create incentives for network members to actively recruit new members. Despite indications that the latter “peer effect” can be more important for network growth than the installed-base effect, it has so far been largely ignored in the literature. We address this gap using game-theoretical models. When all early adopters can band together to exert peer influence—an assumption that fits, e.g., the case of firms supporting a technical standard—we find that the peer effect induces additional growth of the network by a factor. When, in contrast, individuals exert peer influence in small groups of size n, the increase in network size is by an additive constant—which, for small networks, can amount to a large relative increase. The difference between small, local, personal networks and large, global, anonymous networks arises endogenously from our analysis. Fundamentally, the first type of networks is “tie-reinforcing,” the other, “tie-creating”. We use survey data from users of the Internet services, Skype and eBay, to illustrate the main logic of our theoretical results. As predicted by the model, we find that the peer effect matters strongly for the network of Skype users—which effectively consists of numerous small sub-networks—but not for that of eBay users. Since many network goods give rise to small, local networks, our findings bear relevance to the economics of network goods and related social networks in general. Copyright Springer-Verlag Berlin Heidelberg 2013
Volume (Year): 23 (2013)
Issue (Month): 5 (November)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/journal/191/PS2|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeffrey Church & Ian King, 1993. "Bilingualism and Network Externalities," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 337-45, May.
- Heli Koski & Tobias Kretschmer, 2004.
"Survey on competing in network industries : firm strategies, market outcomes, and policy implications,"
LSE Research Online Documents on Economics
803, London School of Economics and Political Science, LSE Library.
- Heli Koski & Tobias Kretschmer, 2004. "Survey on Competing in Network Industries: Firm Strategies, Market Outcomes, and Policy Implications," Journal of Industry, Competition and Trade, Springer, vol. 4(1), pages 5-31, 03.
- Erik Brynjolfsson & Chris F. Kemerer, 1996.
"Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market,"
INFORMS, vol. 42(12), pages 1627-1647, December.
- Erik Brynjolfsson & Chris F. Kemerer, 1993. "Network Externalities in Microcomputer Software: An Econometric Analysis of the Spreadsheet Market," Working Paper Series 158, MIT Center for Coordination Science.
- Jonard, N. & Yfldizoglu, M., 1998.
"Technological diversity in an evolutionary industry model with localized learning and network externalities,"
Structural Change and Economic Dynamics,
Elsevier, vol. 9(1), pages 35-53, March.
- Nicolas Jonard & Murat Yildizoglu, . "Technological Diversity in an Evolutionary Industry Model with Localized Learning and Network Externalities," Computing in Economics and Finance 1997 13, Society for Computational Economics.
- 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 822-41, August.
- An, M Y & Kiefer, N M, 1995. "Local Externalities and Societal Adoption of Technologies," Journal of Evolutionary Economics, Springer, vol. 5(2), pages 103-17, June.
- Joseph Farrell & Garth Saloner, 1984.
"Standardization, Compatibility and Innovation,"
345, Massachusetts Institute of Technology (MIT), Department of Economics.
- Catherine Tucker, 2008. "Identifying Formal and Informal Influence in Technology Adoption with Network Externalities," Management Science, INFORMS, vol. 54(12), pages 2024-2038, December.
- Heli Koski, 1999. "The Installed Base Effect: Some Empirical Evidence From The Microcomputer Market," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 8(4), pages 273-310.
- Daniel Birke & G. Swann, 2006. "Network effects and the choice of mobile phone operator," Journal of Evolutionary Economics, Springer, vol. 16(1), pages 65-84, April.
- Katz, Michael L & Shapiro, Carl, 1992. "Product Introduction with Network Externalities," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 55-83, March.
- Marc Rysman, 2004. "Competition Between Networks: A Study of the Market for Yellow Pages," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 483-512.
- Deroian, Frederic, 2002. "Formation of social networks and diffusion of innovations," Research Policy, Elsevier, vol. 31(5), pages 835-846, July.
- Solomon, Sorin & Weisbuch, Gerard & de Arcangelis, Lucilla & Jan, Naeem & Stauffer, Dietrich, 2000. "Social percolation models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 277(1), pages 239-247.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
- John H. Miller & Robin Cowan, 1998. "Technological standards with local externalities and decentralized behaviour," Journal of Evolutionary Economics, Springer, vol. 8(3), pages 285-296.
- Neil Gandal, 1994. "Hedonic Price Indexes for Spreadsheets and an Empirical Test for Network Externalities," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 160-170, Spring.
- Bettencourt, Luís M.A. & Cintrón-Arias, Ariel & Kaiser, David I. & Castillo-Chávez, Carlos, 2006. "The power of a good idea: Quantitative modeling of the spread of ideas from epidemiological models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 364(C), pages 513-536.
- Masaki Tomochi & Hiroaki Murata & Mitsuo Kono, 2005. "A consumer-based model of competitive diffusion: the multiplicative effects of global and local network externalities," Journal of Evolutionary Economics, Springer, vol. 15(3), pages 273-295, 08.
- Eocman Lee & Jeho Lee & Jongseok Lee, 2006. "Reconsideration of the Winner-Take-All Hypothesis: Complex Networks and Local Bias," Management Science, INFORMS, vol. 52(12), pages 1838-1848, December.
When requesting a correction, please mention this item's handle: RePEc:spr:joevec:v:23:y:2013:i:5:p:925-953. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.