In 1962 Everett Rogers introduced the theory of the Diffusion of Innovation. This theory explains how, why, and at what rate new ideas and technology spread. Innovation and new ideas do not get adopted by the fact that it is a good idea. This is dependent on the innovation itself, communication channels, time, and the social system. The categories of how we adopt new ideas or innovations are according to the theory: innovators, early adopters, early majority, late majority, and laggards. Below a picture represents these categories in relation to market share.
In the upcoming August 2016 edition of the Journal of Behavioral and Experimental Economics there is new insight that peer effects play an important role in the diffusion of innovations and how it can occur in different circumstances.
The research shows that peer effects are driven by different mechanisms in relation to the stages of adoption.
- In the early stages of adoption, individuals can only base their adoption decision on basic information about the innovation by individual information exchange.
- In the majority stages, adoption decisions heavily rely on the experiential knowledge and resources they can collect from earlier adopters. As experience is scarce in this stage, an individual can only obtain it from those who they are closely linked with.
- In the late stages, when the majority has adopted the innovation, it is important what the adoption behavior is of someone’s peers. This is defined as the externality effect.
Peer effects can only be measured if we understand who the peers are. Therefore it is important to understand the relevant networks in which people operate. The research shows that peer effects can be misunderstood if they are treated as a composite without distinguishing the specific underlying effects.
Xiong, H., Payne, D., & Kinsella, S. (2016). Peer effects in the diffusion of innovations: Theory and simulation. Journal of Behavioral and Experimental Economics, 63, 1-13.