Information Cascade and Network Effects as seen on Online Shopping
http://www.retailgazette.co.uk/articles/30122-social-networks-affect-consumer-decisionmaking
In this blog post, I’ll be relating a short article, published last month in Britain, to the principles of Information Cascade and Network Effects we’ve been talking about recently. In Chapter 16 we learned how being connected in a network can allow for your behaviors and decisions to be influenced by others. We also saw the effects of how these influences can cause population-wide changes due to networks influencing individual’s subsequent behaviors. In Chapter 17 we learned more about why this can occur. In networks, a possible reason why an individual can have an effect on another’s decisions is due to the principle of informational effects. This argues that since the behavior of other people conveys information about what they know, then observing their behaviors and copying it can be a rational decision within the network. Another explanation for why this occurs in networks is the principle of direct-benefit effects, which says that with some decisions you benefit from aligning your behavior with others in the network. Both of these principles and the effects of information cascade and network effects are quite evident in today’s consumer trends and social networking sites that allow for customers to rate and report on products.
A growing feature of many sites on the Internet, both social networking and store’s websites alike, is the feature of being able to post comments and reviews about products. Consumers can anonymously post their opinions after purchasing a product so that all others going to purchase this product online can read the reviews and base their decisions on what previous consumers have thought. The article I found talks about how people are being increasingly influenced by others when making decisions about shopping. This article features results from a study done by IBM that found that 50% of adults 16-64 years of age consult a social networking site to read reviews of products from others before going shopping. This shows us how largely network effects, especially the principle of informational effects, is shaping the behavior of other consumers in our world. From the study and what we know about our Economic studies, it is clear that people are relying more and more upon other’s in their “networks” to influence them in to what to purchase, thus perpetuating the network effects.