Herd Behavior and Software Adoption on the Internet: An Empirical Investigation

Abstract

Online users often need to make adoption decisions without accurate information about the product values. Herding is common in such situations where users infer values from other customers' choices and incorporate that information into their own decision-making process. Herding is often rational for individual decision-making; however, it may lead to adoption of inferior products. The Internet affects the herding phenomenon in adoption decisions in two ways. On the one hand, it provides more information about other users' choices, therefore making herding more feasible. On the other hand, the Internet provides more details about product values, thus making herding less desirable. In this paper, we empirically examine herd behavior in the context of online software adoption. Consistent with the predictions of the informational cascades literature, we find that online users engage in significant herd behavior in choosing software programs, and professional product reviews and user reviews have little impact on the popularity of software programs. We also find that, while product reviews do not directly affect software popularity, their availability mitigates the herd behavior. Our results validate informational cascades as an important driver for decision-making on the Internet.

Keywords: E-commerce, herding, informational cascades, decision-making, network externalities, software download, online communities, online user review

JEL Classification: L86, M31, D12, M21, L15, C50