Peer Effects in Product Adoption
56 Pages Posted: 25 Jun 2019 Last revised: 18 Nov 2021
Date Written: 2019
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 usersâ€™ cell phone models. To identify peer effects, we use variation in friendsâ€™ 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 individualâ€™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 friendâ€™s purchase of a new phone of a particular brand can reduce individualsâ€™ own demand for phones from competing brandsâ€”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 firmsâ€™ markups and, in many models, contribute to higher consumer surplus and more efficient resource allocation.
Keywords: peer effects, demand spillovers, social learning
JEL Classification: L100, L200, M300, D400
Suggested Citation: Suggested Citation