Peer Influence in Network Markets:An Empirical and Theoretical Analysis

Network externalities spur the growth of networks and the adoption of network goods intwo ways. First, they make it attractive to join a network with a large installed base.Second, they make it attractive for network members to actively recruit new members.Despite indications that this “peer effect” can be more important for network growththan the installed-base effect, it has so far been largely ignored in the literature. We aimat closing this gap, using both survey data and a game-theoretical model. Comparingrespondents’ adoption of two distinct networks goods, we find that the peer effect mattersstrongly for small, but not for large networks....