Homophily or Influence? An Empirical Analysis of Purchase within a Social Network

Consumers that are close to one another in a social network are known to have similar behaviors. The focus of this study is the extent to which such observed similarity is driven by homophily or social influence. Homophily refers to the similarity in product preferences between individuals who are connected. Social influence is the dependence of consumers’ purchase decisions on their communication with others. We construct a hierarchical Bayesian model to study both the timing and choice of consumer purchases within a social network. Our model is estimated using a unique social network dataset obtained from a large Indian telecom operator for the purchase of caller ringer-back tones. We find strong social influence effects in both the purchase-timing and product-choice decisions of consumers. In the purchase-timing decision, we find that consumers are three times more likely to be influenced by network neighbors than by other people. In the product-choice decision we find a strong homophily effect. We show that ignoring either homophily or social influence will result in overestimated effects of the other factor. Furthermore, we show that detailed communication data is crucial for measuring influence effect, and influence effect can be either overor underestimated when such data is not available. Finally, we conduct policy simulations on a variety of target marketing schemes to show that promotions targeted using network information is superior. For example, we find a 4-21% improvement on purchase probability, and an 11-35% improvement for promoting a specific product.