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

Consumers who are close to one another in a social network often make similar purchase decisions. This similarity can result from latent homophily or social influence, as well as common exogenous factors. Latent homophily means consumers who are connected to one another are likely to have similar characteristics and product preferences. Social influence refers to the ability of one consumer to directly influence another consumer's decision based upon their communication. We present an empirical study of purchases of caller ring-back tones using data from an Asian mobile network that predicts consumers' purchase timing and choice decisions. We simultaneously measure latent homophily and social influence, while also accounting for exogenous factors. Identification is achieved due to our dynamic, panel data structure and the availability of detailed communication data. We find strong influence effects and latent homophily effects in both the purchase timing and product choice decisions of consumers.