Management Information Systems Quarterly
Abstract
We study the effect of peer influence on products that exhibit positive network externalities to non-adopters, i.e., products that benefit adopters’ friends even if they do not adopt. In contrast to products that exhibit positive network externalities upon adoption, this structure of incentives likely results in negative peer influence: the more friends that adopt the product, the smaller the incentive to adopt. We measure this effect empirically by using observational data from a large mobile carrier serving 5.7 million users. We estimate the effect of peer influence across five different products of this type. A naive approach to do this results in a positive estimate for peer influence due to unobserved homophily. We follow two approaches to address this issue. First, we suggest using the number of friends that end up adopting a product as a proxy for unobserved user-fixed effects. Second, we control for homophily by applying a shuffle test, i.e., we compare the effect of peer influence from the original data with the effect obtained from comparable randomly generated data without peer influence. We obtain negative estimates from both approaches, which adds robustness to our findings. Finally, we show that even for these products, the effect of peer influence associated with the first friends that adopt the product is positive because they still convey useful information that reduces uncertainty. The negative effect of peer influence arises only for subsequent friends that adopt the product. While these friends are unlikely to convey new information about the product, they decrease the economic incentive to adopt, resulting in a negative aggregate effect of peer influence.