Peer Effects in Product Adoption
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.
For their helpful comments, we thank Tim Armstrong, John Campbell, Liran Einav, Matt Gentzkow, Ed Glaeser, Paul Goldsmith-Pinkam, Michal Kolesar, Matthew Notowidigdo, Alex Peysakhovich, Luigi Pistaferri, Paulo Somaini, and Chris Tonetti, as well as seminar and conference participants at Baruch, Carnegie Mellon, Facebook, NYU, Stanford, UNC Chapel Hill, UT Austin, Wharton, Yale, and the Empirical Macro Workshop in Las Vegas. We thank the Center for Global Economy and Business at NYU Stern for generous research support. We also thank Abhinav Gupta, Sung Lee, and Hongbum Lee for excellent research assistance. This research was facilitated through a research consulting agreement between some of the academic authors (Johnston, Kuchler, and Stroebel) and Facebook. Bailey is an employee at Facebook. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.