Social Influence and Evolution of Market Share

Abstract:     
We propose a model for the evolution of market share in presence of social influence. We study a simple market in which the individuals arrive sequentially and choose one of the available products. Their decision of which product to choose is a stochastic function of the inherent quality of the product and its market share.

Using techniques from stochastic approximation theory, we show that market shares converge to an equilibrium. We also derive the market shares at equilibrium in terms of the level of social influence and the inherent fitness of the products.

In a special case, when the choice model is a multinomial logit model, we show that inequality in the market increases with social influence and with strong enough social influence, monopoly occurs. These results support the observations made by Salganik et al. in their experimental study of cultural markets.

Number of Pages in PDF File: 25

Keywords: Theory, Economics, Social Influence, Market Share, Social Network

JEL Classification: C44, C72, D85, C72, L14

Accepted Paper Series