How Peer Influence Affects Attribute Preferences: A Bayesian Updating Mechanism

Abstract

We study how multi-attribute product choices are affected by peer influence. We propose a two-stage conjoint based approach to examine three behavioral mechanisms of peer influence. We find that when faced with information on peer choices, consumers update their attribute preferences in a Bayesian manner. This suggests that greater uncertainty in the attribute preferences of a focal consumer and lesser uncertainty in preferences of peers both lead to greater preference revision. Greater number of peers is associated with greater preference revision, though the extent of preference revision diminishes with increasing number of peers. Furthermore, to address the significant time and costs associated with collecting sociometric data, we estimate the accuracy of predicted consumer choices when peer influence data are unavailable. Online social network membership and frequency of peer interactions provide better proxies than more common demographic similarity measures. These findings have key implications, especially for word-of-mouth marketing.

Keywords: Preference Revision, Bayesian Updating, Attribute Preference Uncertainty, Social Networks, Social Influence, Conjoint Analysis, Bayesian Estimation

JEL Classification: C11, C91, D11, D12, D81, M31