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Econometrics 2016, 4(4), 42; doi:10.3390/econometrics4040042

Social Networks and Choice Set Formation in Discrete Choice Models

Department of Resource Economics and Environmental Sociology, University of Alberta, 214F Agriculture/Forestry Ctr, Edmonton, AB, Canada T6G 2P5
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Academic Editor: William Greene
Received: 19 December 2015 / Revised: 4 October 2016 / Accepted: 14 October 2016 / Published: 27 October 2016
(This article belongs to the Special Issue Discrete Choice Modeling)
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Abstract

The discrete choice literature has evolved from the analysis of a choice of a single item from a fixed choice set to the incorporation of a vast array of more complex representations of preferences and choice set formation processes into choice models. Modern discrete choice models include rich specifications of heterogeneity, multi-stage processing for choice set determination, dynamics, and other elements. However, discrete choice models still largely represent socially isolated choice processes —individuals are not affected by the preferences of choices of other individuals. There is a developing literature on the impact of social networks on preferences or the utility function in a random utility model but little examination of such processes for choice set formation. There is also emerging evidence in the marketplace of the influence of friends on choice sets and choices. In this paper we develop discrete choice models that incorporate formal social network structures into the choice set formation process in a two-stage random utility framework. We assess models where peers may affect not only the alternatives that individuals consider or include in their choice sets, but also consumption choices. We explore the properties of our models and evaluate the extent of “errors” in assessment of preferences, economic welfare measures and market shares if network effects are present, but are not accounted for in the econometric model. Our results shed light on the importance of the evaluation of peer or network effects on inclusion/exclusion of alternatives in a random utility choice framework. View Full-Text
Keywords: independent availability logit; social networks; choice set formation; welfare; market shares independent availability logit; social networks; choice set formation; welfare; market shares
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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Wichmann, B.; Chen, M.; Adamowicz, W. Social Networks and Choice Set Formation in Discrete Choice Models. Econometrics 2016, 4, 42.

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