Peer Effects in Product Adoption

58 Pages Posted: 22 May 2019

See all articles by Michael Bailey

Michael Bailey

Facebook

Drew M. Johnston

New York University (NYU) - Leonard N. Stern School of Business

Theresa Kuchler

New York University (NYU)

Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Arlene Wong

Princeton University

Multiple version iconThere are 3 versions of this paper

Date Written: May 2019

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.

Keywords: Demand Spillovers, peer effects, Social learning

JEL Classification: D4, L1, L2, M3

Suggested Citation

Bailey, Michael and Johnston, Drew M. and Kuchler, Theresa and Stroebel, Johannes and Wong, Arlene, Peer Effects in Product Adoption (May 2019). CEPR Discussion Paper No. DP13731. Available at SSRN: https://ssrn.com/abstract=3391078

Michael Bailey (Contact Author)

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Drew M. Johnston

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Theresa Kuchler

New York University (NYU) ( email )

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Johannes Stroebel

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Suite 9-160
New York, NY NY 10012
United States

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Arlene Wong

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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