Peer Effects in Product Adoption

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 phonemodels.   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 large 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 sociallearning 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.

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