We analyze the effect of peer influence on the diffusion of an innovative network good. We argue that the adopters of a network good have an incentive to convince others to purchase the same product because their utility depends on the number of other users. This peer-effect influences individuals’ adoption decisions alongside the more familiar installed-base-effect, based on the individual’s own insight that a larger number of installed units increases his/her benefit of adopting. We test empirically which effect dominates with Instant Messaging, an innovative network good. We arrive at surprising results with far-reaching implications for research and management. The diffusion of Instant Messaging was to a large extent driven by the peer-effect, but the installed-base-effect seemed to play no role. We perform our estimation with a discrete time hazard rate model that controls for unobserved heterogeneity.

Hazard Rate Model, Innovation Diffusion, Instant Messaging, Network Markets, Peer Influence
Business Administration and Business Economics; Marketing; Accounting (jel M), New Firms; Startups (jel M13), Marketing (jel M31), Management of Technological Innovation and R&D (jel O32)
Erasmus Research Institute of Management
hdl.handle.net/1765/10540
ERIM Report Series Research in Management
ERIM report series research in management Erasmus Research Institute of Management
Erasmus Research Institute of Management

Block, J.H, & Koellinger, Ph.D. (2007). Peer Influence in Network Markets: An Empirical Investigation (No. ERS-2007-063-ORG). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/10540