Working Paper: CEPR ID: DP13731
Authors: Michael Bailey; Drew Johnston; Theresa Kuchler; Johannes Stroebel; Arlene Wong
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 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.
Keywords: peer effects; demand; spillovers; social learning
JEL Codes: L1; L2; M3; D4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Friend's purchase of a new phone (L96) | Individual's own demand for phones of the same brand (D12) |
| Friend's purchase of a new phone (L96) | Individual's probability of buying a new phone (L96) |
| Friend's purchase of a new phone (L96) | Individual's demand for competing brands (D12) |
| Peer effects (C92) | Elasticity of aggregate demand (E00) |
| Peer effects (C92) | Lower firm markups and higher consumer surplus (D43) |