A trick of the tail: the role of social networks in shaping distributional properties of experience-good markets
Résumé
The diffusion of social media has radically changed the number of peers with whom consumers interact with when making a decision. While consumption decisions depend on many factors, such as
prices, qualities, distribution channels, and marketing, in this article, we study the effects of a single
aspect: the role of the number of social connections in shaping consumers’ decisions. We present an
agent-based simulation model where virtual consumers respond solely to information provided by
peers from their social network. We obtain that increasing the number of connections consumers
rely upon to gather information changes radically the distributional properties of markets where consumers cannot obtain direct information about the available options, such as experience goods. In
particular, we show that increasing the number of connections among consumers increases the concentration of the top- and low-end market share options, sharply decreasing the number of “midsized” options. This effect is in line with evidence from markets for movies and music, which rely
heavily on information gathered through peers.