Do Friends Influence Purchases in a Social Network?

In spite of the cultural and social revolution in the rise of social networking sites such as Facebook and MySpace (and in South Korea, Cyworld), the business viability of these sites remains in question. While many sites are attempting to follow Google and generate revenues from advertising, will advertising be effective? If friends influence the purchases of a user in a social network, it could potentially be a significant source of revenue for the sites and their corporate sponsors. Using a unique data set from Cyworld, this study empirically assesses if friends indeed influence purchases. The answer: It depends. Findings are relevant for social networking sites and large advertisers. Key concepts include:

  • There is a significant and positive impact of friends' purchases on the purchase probability of a user.
  • However, there are significant differences across users. Specifically, this social effect is zero for 48 percent of the users, negative for 12 percent of the users, and positive for 40 percent of the users.
  • "Moderately connected" users exhibit "keeping up with the Joneses" behavior. On average, this social influence translates into a 5 percent increase in revenues.
  • Highly connected users tend to reduce their purchases of items when they see their friends buying them. This negative social effect reduces the revenue for this group by more than 14 percent. This finding is consistent with the typical fashion cycle wherein opinion leaders or the elite in the fashion industry tend to abandon one type of fashion and adopt the next in order to differentiate themselves from the masses.

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