Research

Abstract: Social influence is an important driver of consumption behavior, but its effect on firm competition and pricing is understudied. While social influence may create an incentive for firms to reduce initial prices to attract a larger customer base, it can also result in firms charging higher prices in the future because of a social differentiation effect. This paper investigates whether and how social influence affects product choices and firm competition, drawing on a novel dataset that consists of large scale de-identified mobile call records from a city in China. I first identify social influence using a new identification strategy that exploits the partially overlapping network of friends and residential neighbors and the intertemporal variation in friend circles. I find that the purchasing probability for a phone model doubles with 10 percent more friends using the same model. Consumers are more likely to conform to wealthier friends and choose visually distinct features, suggesting that status-seeking motivation may be an important driver of social influence. I then evaluate how social influence affects firm competition by building and estimating a structural model that incorporates social influence in consumer demand. I find that social influence favors high-quality products while reducing low-quality products' market share. In addition, a small price drop of a product would lead to larger gains through quantity expansion by peers. Social influence, on average, reduces initial prices by 0.7 percent and increases subsequent prices by 0.1 percent. It also increases the total profits of new products by 3.4 percent and increases consumer surplus by about 1.7 percent.