Peer Influence in Network Markets: An Empirical Investigation
Schmalenbach Business Review, Vol. 59, October 2007
23 Pages Posted: 14 Nov 2007
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.
Keywords: Hazard Rate Model, Innovation Diffusion, Instant Messaging, Network Markets, Peer Influence
JEL Classification: D12, M3, O32
Suggested Citation: Suggested Citation