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Peer effects in product adoption

Author

Listed:
  • Michael Bailey
  • Drew Johnston
  • Theresa Kuchler
  • Johannes Stroebel
  • Arlene Wong

Abstract

We study the nature of peer effects in the market for new cell phones. Our analysis builds on de-identified data from Facebook that combine information on social networks with information on users’ cell phone models. To identify peer effects, we use variation in friends’ new phone acquisitions resulting from random phone losses and carrier-specific contract terms. A new phone purchase by a friend has a substantial positive and long-term effect on an individual’s own demand for phones of the same brand, most of which is concentrated on the particular model purchased by the friend. We provide evidence that social learning contributes substantially to the observed peer effects. While peer effects increase the overall demand for cell phones, a friend’s purchase of a new phone of a particular brand can reduce individuals’ own demand for phones from competing brands—in particular those running on a different operating system. We discuss the implications of these findings for the nature of firm competition. We also find that stronger peer effects are exerted by more price-sensitive individuals. This positive correlation suggests that the elasticity of aggregate demand is substantially larger than the elasticity of individual demand. Through this channel, peer effects reduce firms’ markups and, in many models, contribute to higher consumer surplus and more efficient resource allocation.

Suggested Citation

  • Michael Bailey & Drew Johnston & Theresa Kuchler & Johannes Stroebel & Arlene Wong, 2019. "Peer effects in product adoption," CESifo Working Paper Series 7685, CESifo.
  • Handle: RePEc:ces:ceswps:_7685
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    References listed on IDEAS

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    Cited by:

    1. Michael Bailey & Patrick Farrell & Theresa Kuchler & Johannes Stroebel, 2019. "Social Connectedness in Urban Areas," NBER Working Papers 26029, National Bureau of Economic Research, Inc.
    2. Bailey, Michael & Farrell, Patrick & Kuchler, Theresa & Stroebel, Johannes, 2020. "Social connectedness in urban areas," Journal of Urban Economics, Elsevier, vol. 118(C).
    3. Bailey, Michael & Farrell, Patrick & Kuchler, Theresa & Ströbel, Johannes, 2019. "Social Connectedness in Urban Areas," CEPR Discussion Papers 13822, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    peer effects; demand spillovers; social learning;

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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