Peer Influence in Network Markets: An Empirical Investigation

Abstract

We analyze the effect of peer influence on the diffusion of an innovative network good, argu-ing 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 her benefit of adopting. We test empirically which effect dominates with Instant Messaging, an innovative network good, and 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, whilst the installed-base-effect seemed to play no role. Estimation is carried out with a discrete time hazard rate model that controls for unobserved heterogeneity.

Keywords: Innovation Diffusion, Peer Pressure, Peer Influence, Network Markets, Hazard Rate Model, Instant Messaging

JEL Classification: M3, D12, O32