Impact Geografic Decision

Decision Sciences
Volume 42 Number 4
November 2011

C 2011 The Authors
C 2011 Decision Sciences Institute
Decision Sciences Journal
The Impact of Geographic Proximity on

What to Buy, How to Buy, and Where to
Buy: Evidence from High-Tech Durable
Goods Market
Ramkumar Janakiraman
220 Wehner, Mays Business School, Texas A&M University, College Station, TX 77843-4112,
e-mail: ram@mays.tamu.edu
Rakesh Niraj
Weatherhead School of Management, Case Western Reserve University, Cleveland, OH 44106,
e-mail: rkn10@case.edu
ABSTRACT
Social contagion effects due to geographical proximity refer to the social effects wherein
the behavior of an individual varies with the behavior of other individuals who are geographically close. Although the influence of such effects on consumer choices has been
established in several contexts, much of the extant studies have focused on its effect
on consumers decision of whether to buy a new product or adopt a new innovation.
There has been no systematic examination of the influence of geographic proximity on
other aspects of consumers product buying process such as what to buy (i.e., brand
choice), how to buy (i.e., the channel), and where to buy (i.e., retailers). Such effects
can matter significantly in high-technology and durable goods markets and therefore,
it is critical to understand the scope of these on consumers choice of retailers and
channel as well. Drawing on literatures from word of mouth effects, ecommerce, and
consumers perception of risk in their purchase process, we develop a set of hypotheses
on the effect of geographic proximity on consumers choices of what to buy, how to buy,
and where to buy. Leveraging a microlevel dataset of purchases of personal computers,
we develop brand-, retailer-, and channel-related measures of proximity effects at the
individual consumer level and estimate a joint disaggregate model of the three choices
that make up a product purchase process to test these hypotheses. Our results indicate
a significant contagion effect on each of the three choices. Furthermore, we find evidence of a greater effect of geographic proximity on inexperienced consumersthose
who are new to the product category. Our results thus help develop a holistic understanding of the influence of social contagion effects on consumers decision making.
We thank the anonymous reviewers and the seminar participants at the following conferences for their
comments and suggestions: Marketing Science (2007), European Marketing Academy (2008), Yale Center
for Customer Insights (2009), and the Marketing Research Camp (2009) at Texas A&M University. The
first author acknowledges the financial support in the form of the Alton M. and Marion R. Withers Retailing
Research Grant received from the Center for Retailing Studies at Texas A&M University in support of this
research. The usual disclaimer applies.
Corresponding
author.
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890
The Impact of Geographic Proximity
[Submitted: August 12, 2010. Revisions received: March 15, 2011; May 30, 2011.
Accepted: June 7, 2011.]
Subject Areas: Consumer Decision Making, Durable Goods, Geographic

Proximity, High-Tech Markets, and Social Contagion.
INTRODUCTION
Social contagion effects due to geographic proximity, also sometimes referred to
as neighborhood effects or word of mouth effects, refer to a social effect wherein
the behavior of a focal actor varies with the behavior of the other individuals who
are geographically close (Manski, 2000). In an often studied context of behavior
of innovation adoption, these two groups are the potential adopters, who have
not yet adopted, and adopters, those who have already adopted an innovation
(Burt, 1987). Accordingly, a rich stream of literature in marketing, economics,
and sociology has established the importance of contagion effects via geographical proximity on innovation adoption behavior in several contexts, ranging from
farmers adoption of a new crop in Ghana (Conley & Udry, 2010) to physicians
in Manhattan adopting a new drug (Manchanda, Xie, & Youn, 2008). However,
beyond influencing consumers decision to adopt a (new) product or not, such
effects could also play an important role in other types of consumers choice processes. Once a consumer has decided to buy a product, the consumer still has
other decisions to make in the purchasing process such as what to buy (i.e., brand
choice), how to buy (i.e., channel choice), and where to buy (i.e., place or retailer
choice). The underlying mechanisms of direct learning from other consumers,
observation, and social-normative pressures (Van den Bulte & Stremersch, 2004)
that make geographic proximity effective and relevant in consumers decision
to adopt a new product, may also be relevant in consumers decisions of what,
where, and how to buy a product, especially for complex, high-priced, and highinvolvement products. Barring rare exceptions, (e.g., Roberts & Urban, 1988),
studies have generally not systematically analyzed the effect of contagion on consumers brand, channel, or retailer choice, let alone all three of these choices simultaneously. The primary purpose of our study is to address this gap in the literature,
which we accomplish by empirically examining the contagion effects due to geographic proximity on consumers choices of brand, retailer, and channel in a single
framework.
Drawing on literature focused on word of mouth effects, ecommerce, and
consumers perception of risk in their purchase process, we first argue that proximity effects can influence the three choices of brand, retailer, and channel in consumers purchase process of a high-involvement durable product. Furthermore, we
hypothesize and test for interaction effects between proximity effects and prior
experience of consumers with the product category, to explain how geographic
proximity can have a greater effect on those consumers who lack experience with
the product category. To test our hypotheses, we develop a disaggregate level joint
model, consistent with random utility framework, of consumers decisions of what
brand of product to buy, where to buy it, and how to buy the product, and analyze
Janakiraman and Niraj
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how each of the three decisions are influenced by proximity effects that serve as
proxies for social contagion. Modeling each of the three decisions as a conditional
multinomial logit, we estimate the parameters of the three models jointly.
The context of our study is consumers purchase of a durable product, namely
personal computers (PCs), which we believe is appropriate for a number of reasons.
First, such effects can be important in high-technology and durable goods markets
like those of PCs, which are characterized by a high degree of decision difficulty
(Duhan, Johnson, Wilcox, & Harrell, 1997). A prior study by Goolsbee and Klenow
(2002) has indeed established the effect of geographic proximity in this context by
showing that consumers are more likely to buy their first PC if a large percentage
of people around them own computers. Experimental research also finds strong
evidence of the role of word of mouth communication in establishing favorable
attitudes toward PC brands (Herr, Kardes, & Kim, 1991). Secondly, for complex,
high-priced and high-involvement products such as PCs, even after a consumer
decides to buy (adopt) a computer, a choice still needs to be made regarding which
brand of computer to buy, where to buy it from (i.e., the retailer type), and how
to buy it (i.e., by physically visiting a retailer store or remotely via online or
other distance buying methods). We argue that for this class of products, proximity
effects can influence (over and above the category purchase decision) all three
distinct but interrelated decisions that make up the product purchase process. For
example, influenced by a neighbor, a consumer might decide to buy the same brand
of computer (e.g., HP), via the same channel (e.g., in-store), and from the same
type of retailer (e.g., electronics store such as Best Buy) as her neighbor.
Our data track purchases of PCs by individual consumers, the brand of PC
they bought, the type of retailer they bought from, and the channel they bought
from. Leveraging these data, we develop individual consumer level measures of
proximity effects for the three choices. More specifically, our brand-, retailer-,
and channel-related proximity effects are consumer specific and are based on
the choice behavior of those who are geographically proximate to a consumer.
Though the new product diffusion literature in marketing has modeled the word
of mouth or social contagion effect for the last three decades, much of the studies
have done so using aggregate sales data (Horsky & Simon, 1983) or word of
mouth as measured at the aggregate level (Roberts & Urban, 1988). Although
these studies help us to understand the take off and sales of a new product at
a macrolevel, the adoption of a new product occurs at the individual consumer
level. Several researchers have emphasized the need to examine adoption at the
individual decision-maker level with an emphasis on decision making. Therefore,
more recent studies have been concerned with measuring proximity effects at
the microlevel using disaggregate models (Bell & Song, 2007; Manchanda et al.,
2008). Thus our study joins the limited but growing literature on examining these
effects using behavioral microlevel data.
This article makes three important contributions to the literature. First, most
of the extant studies have focused on understanding contagion effects in the context of consumers adoption of a new product. However, while prior literature has
established that these effects influence consumers decision of whether or not to
adopt a new product, the related important question that has remained unexplored
is whether these effects also influence consumers choice of a particular brand in a
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competitive setting (i.e., among several alternative brands) in a category that is not
new. In exploring this question fully, we model the consumers purchase process
comprehensively and uncover the full scope of proximity effects on consumers
decision making. Second, no study to our knowledge has empirically disentangled the mechanisms by which social contagion effects operate on consumers.
Broadly, such effects can operate via two different mechanisms: the informative
effect (i.e., learning about product quality) and the persuasive effect (i.e., socialnormative pressure). Studies that work with behavioral data (such as ours) would
not be able to directly differentiate between the two effects. By comparing the
effect of geographic proximity on choices of experienced consumers with those
made by inexperienced consumers, we are also able to shed light on how these
effects work (i.e., the underlying mechanisms by which proximity effects operate on consumers). Our findings that geographic proximity has a significant effect
even on experienced consumers choice of a brand in a well-known category, along
with its effect on their decision of how they bought the product and where they
bought the product, points to the pervasive role of proximity effects on consumers
choice behavior. Finally, from practitioners point of view, the topic of consumer
connectedness has gained a lot of importance, with several firms providing platforms (e.g., blogs) which can facilitate information exchange between consumers.
We believe that our study and its findings add interesting insights to this topical
issue.
Our results indicate that social contagion has a significant influence on consumers choices of brand, channel, and place of purchasing a PC. In reaching this
conclusion, we account for several factors that may confound proximity effects and
for consumers unobserved preferences for the different brands (of PCs), places,
and channels, and for marketing-mix variables. Furthermore, we find that inexperienced consumers (i.e., those who are new to the product category) are more
influenced by these effects when it comes to their choices of brand, retailer type,
and channel. Interestingly, we also find that the effect of social contagion on brand
choice is greater than the effect of place and channel contagion on consumers
place and channel choices, respectively. Based on our results, we argue for the
presence of both persuasive and informative effects of social contagion and draw
implications for managerial decisions regarding marketing-mix allocation efforts.
The remainder of the manuscript is organized as follows. We first discuss
the pertinent theory and develop hypotheses related to proximity effects. Next, we
discuss certain modeling issues and caveats related to such effects that the prior
literature has identified. Following that, we explain the data and the industry background. We then present our proposed model and discuss important specification
issues and the estimation procedure that addresses the caveats identified previously.
Subsequently, we present the results of our proposed model. The article concludes
with the discussion of results, implications, and directions for future research.
THEORY AND HYPOTHESES

From consumers point of view, the purchase of a product, especially that of
durable products, is often associated with high perceived risks. The theory of
perceived risk (Bauer, 1960) suggests that, when faced with a purchase situation
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that involves risk, consumers take appropriate measures in an attempt to reduce

that risk. One major component of risk is performance risk (Lutz & Reilly, 1974),
also called economic risk (Prasad, 1975), which is due to quality uncertainty that
is associated with the performance of various brands in a product category. In an
effort to minimize uncertainty and to reduce the related economic risk, consumers
seek information about the various brands in the particular category.
The sources of information can be broadly divided into two categories: one
that is influenced by firm controlled marketing communication efforts, and one
that is outside of a firms control. Because they come from sources independent
of the firm marketing the product or service, communications or influences of
people in the neighborhood are perceived as an unbiased source of information
and can be more effective in experience goods or high-technology markets, where
uncertainties associated with the various choices are high. Such independent influences can also come from external rating entities like consumer reports. However,
interpersonal peer-to-peer communications also have the added benefit of being
personal in nature and they also help to reduce another type of risk: social risk.
Social risk accounts for the possibility that when making a choice, consumers take
into account how other people might judge them based on the choice they have
made (Brody & Cunningham, 1968; Prasad, 1975). In such cases, consumers gain
social reassurance or acceptance by seeking the approval and opinion of others
whom they often observe or come in contact with. For both of these reasons, proximity can have a significant effect on consumers choice of a product, especially
those of durable products which are characterized by low purchase frequency, and
high-tech products that are characterized by high uncertainty about their quality.
At this point, we would like to note that following prior studies (Bell & Song,
2007; Manchanda et al., 2008) that use behavioral data to study the effects of
social interactions, we use the terms social contagion and (geographic) proximity
effects as appropriate because we also posit that a large source of social contagion
is geographic proximity.
The idea that social contagion or word of mouth might help consumers in
making risky product decisions goes back several decades (Katz & Lazarsfeld,
1955). The impact of geographic proximity on consumers choice decision of
a risky product (or service) has been established in several contexts such as
consumers selection of an automotive diagnostic garage (Engel, Blackwell, &
Kegerreis, 1969), a physician (Feldman & Spencer, 1965), and employees choice
of health plans (Sorensen, 2006). If a particular product is perceived as important,
then consumers perceive a higher degree of risk in their choice process (Dash,
Schiffman, & Berenson, 1976). Because PCs fall into the category of highly important products owing to monetary investments and potential repeated usage for
important tasks over a long period of time, the level of perceived risk associated with PCs is high. Social contagion facilitated by geographic proximity helps
a potential adopter learn about the quality of the product by direct observation
and seeing the product being used. Even if there were no observational learning, a potential adopter can infer that the product must be of good quality as he
or she sees and hears that a number of people in the area are buying and using
the product. Regardless of the underlying mechanism, knowing that people have
bought a particular product reduces the perceived uncertainty associated with the
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product (Roberts & Urban, 1988). Studies in the economics literature refer to these
indirect network effects as consumption externalities (e.g., Berndt, Pindyck, &
Azoulay, 2003), with the argument being that repeated interaction with users of a
product and/or observation of a product in use can increase consumption externalities, thus reducing the perceived risk associated with the product and encouraging
the buying process. Another contributor to the overall contagion effect might
be a search-cost reduction mechanism. Ecommerce literature has documented
the impact of search cost on consumers channel choice (Brynjolfsson, Hu, &
Rahman, 2009; Forman, Ghose, & Goldfarb, 2009). Consumers need to find out
about brands, channels, and place before buying the product and this search for
information is costly. Just as the Internet can help consumers learn about the search
attributes of a product such as price and thus reduce the associated search costs,
interactions with other users of a product can help reduce the search costs associated with the consumers decision by providing information about both search and
experience attributes. For example, a potential buyer can get useful and credible
information about the different brands of computers from other users which can
lead to lowering of search costs associated with the brand choice decision.
The above mentioned factors are not only applicable to the brand choice
(i.e., which brand of PC to buy), but they can also apply to the place choice
(i.e., retailer, henceforth we use place and retailer interchangeably) and channel
choice in the purchase process. For example, Hisrich, Dornoff, and Kernan (1972)
demonstrated the impact of risk on store choice in the context of durable goods and
concluded that perceived risk influences the store selection process for expensive
and infrequently purchased product categories. Similarly, the effect of risk has
also been shown to apply to consumers decision of how to buy a product (Spence,
Engel, & Blackwell, 1970). Cox and Rich (1964) report that perceived risk may
be the most important variable in the consumers choice between in-home phone
ordering versus in-store shopping, and may explain why some consumers forego
the convenience of shopping remotely from their homes. In our context, buying
a computer remotely involves distinct considerations and risks (buying without
seeing, paying remotely, delivery schedules etc.) and those could be specifically
assuaged, or not, by talking to others who have used such channels. Within a brickand-mortar decision, different retailers have distinct reputations about assortments,
help at the time of purchase, and customer service including return policies. There
are distinct risks in distinct decisions, and we propose that social contagion may
also mitigate the level of perceived risk and the search costs associated with
these decisions, and thus may facilitate the entire buying process. For example, a
potential consumer may learn from her neighbors about the security features of
the various retailers Web sites, and may feel more confident about ordering a PC
online. It is also likely that after learning enough about the features of a PC brand,
the consumer may also feel confident enough to buy the PC from a discount retailer
as opposed to an electronics retailer.
In addition to the mechanism of learning or informational transfer, the contagion effect can also operate via other mechanisms such as social-normative
pressure and competitive concerns. For example, a consumer who would like to
just keep-up with their neighbors and friends may perceive it to be cool to
buy a particular brand of PC and also to buy it online from an electronic store
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retailer because her neighbors did just that. In other words, geographic proximity
can help reduce the social risk in the product purchase process for those consumers
who are concerned about how their neighbors may judge them. Regardless of the
mechanisms that are at play, we expect social contagion facilitated by geographic
proximity to have an effect on all the three choices of the purchasing process.
Therefore we posit:
H1a: Social contagion will have a positive effect on consumers brand choice.
H1b: Social contagion will have a positive effect on consumers choice of a
place to buy.
H1c: Social contagion will have a positive effect on consumers choice of a
channel.
Inexperienced consumers who are purchasing a product for the first time,
especially a complex and high-priced product like a PC, do not have much prior
direct information about the quality of different brands and are likely have low
product-specific self-confidence, which makes them more likely to resort to means
that can help reduce their risks. In the store choice context, Dash, Schiffman,
and Berenson (1976) find support for the idea that consumers who are less selfconfident about a product are more likely to pick department stores as opposed
to specialty stores because such consumers may be overwhelmed by the intense
variety of merchandise in the specialty store. In our context, this could imply that
consumers who do not have prior experience with PCs are more likely to depend
on contagion to help mitigate their higher perceived performance risks. Indeed an
earlier study by Newman and Staelin (1973), also based in the context of durable
goods, finds that consumers who lack prior experience with a product consult more
with their neighbors and friends. Additionally, contagion will exert a higher socialnormative pressure on inexperienced consumers as well. One can argue that while
both learning and social-normative pressures will result in the observed effect of
geographic proximity for inexperienced consumers, the experienced buyers, having
already experienced the product and thus its quality, are influenced primarily by
social-normative peer pressure. From a behavioral perspective, Bettman and Park
(1980) suggest that consumers with low information rely more on information from
prior research. As a result, one would expect the net effect of social contagion to be
greater on inexperienced consumers when compared to experienced consumers.
We note that on one hand, the studies that are concerned with word of mouth
effects (e.g., Roberts & Urban, 1988) do not explicitly compare how experienced
versus inexperienced consumers respond to word of mouth. On the other hand the
behavioral studies that focus on how consumers with different prior knowledge
process and search for information (e.g., Bettman & Park, 1980) do not specifically
focus on information obtained from peers via word of mouth. We bridge this gap
by doing both of these in one unified framework.
The comparison of the effect of geographic proximity on experienced consumers versus inexperienced consumers would also help to disentangle the two
different mechanisms by which social contagion operates. To better understand
the two different roles of proximity to other buyers, it is worthwhile to recall the
two different effects of advertising on consumers that have been established in
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the marketing and economics literature: the informative effect and the persuasive
effect. If advertising informs consumers about the quality of a brand, it is referred
to as having an informative effect. On the other hand, if advertising shifts consumers utility function such that, ceteris paribus, consumers derive more utility
by consuming a brand that is advertised more, then it is referred to as having a
persuasive (or prestige) effect (Ackerberg, 2001). Bagwell (2007) referred to this
as a complementary effect. Ackerberg (2001) also argues that experienced consumers will be influenced by advertising mainly because of its persuasive effect
due to their prior knowledge of the product, while inexperienced consumers will be
influenced by both the informative and persuasive effects of advertising, and indeed
finds evidence of a greater effect of advertising on inexperienced consumers when
compared to experienced consumers. In a similar vein, we expect that while social
contagion will exert both an informative and persuasive effect on inexperienced
consumers, it will have a predominantly persuasive effect on those consumers who
have already experienced the product. Accordingly, we predict,
H2a: Social contagion will have a greater effect on the brand choice of
inexperienced consumers as compared to experienced consumers.
H2b: Social contagion will have a greater effect on the choice of a place to buy
for inexperienced consumers as compared to experienced consumers.
H2c: Social contagion will have a greater effect on the channel choice of
inexperienced consumers as compared to experienced consumers.
MODELING GEOGRAPHIC PROXIMITY EFFECTS

Measures of social contagion due to geographic proximity are developed on the
premise that people who live closer to each other observe and interact with each
other and thus, can influence each others behavior and attitudes. Geographic
proximity is the most basic source of homophily that connects people (McPherson,
Smith-Lovin, & Cook, 2001), and the distance between any two people serves as
a proxy for both the degree of influence on each other (Strang & Tuma, 1993) and
the extent of informational transfer between them (Barrot, Rangaswamy, Albers, &
Shaikh, 2008). Geographic proximity is also an important factor that influences the
closeness of a relationship between two people as determined by the multiplexity
and frequency of contact between them (McPherson et al., 2001). As a result,
many researchers have taken the approach of using distance to operationalize
social contagion. We note that the pros and cons of such a method as opposed
to surveys have been discussed elsewhere (e.g., Manchanda et al., 2008; Manski,
2000). Briefly, the benefits of using the behavior of geographic neighbors are that
it is objective and does not suffer from the biases that are typically associated with
self-reported measures (e.g., social desirability); the primary limitation of such
an approach is that the neighborhood effect is not observed but must be inferred.
Table 1 lists a selection of extant studies that have looked at the effect of social
contagion on consumers.
Consumption
externalities
Geographic
proximity
Reported personal
social network
Reported personal
social network
Reported personal
social network
Network
externalities
Peers choice
Geographic
proximity
Geographic
proximity
Diffusion
New retailer
adoption
New product
adoption
New product
adoption
New product
adoption
New product
adoption
Insurance choice
New product
adoption
Brand, channel and
store choice
Social Contagion
Variables
Dependent
Variable(s)
Disaggregate
Pharmaceuticals
Disaggregate
Disaggregate
Personal computers Disaggregate
Health plans
Pharmaceuticals
Behavioral
Disaggregate
Pharmaceuticals
Personal computers Disaggregate
New
Behavioral +
self-reported
Behavioral +
self-reported
Behavioral +
self-reported
Behavioral +
self-reported
Behavioral
Behavioral
Disaggregate
New and repeat
New and repeat

New
New
New
New
New
New
Behavioral
Behavioral
Prior Experience
(New/Repeat) of
the Decision
Makers
Aggregate
Aggregate
Level of Analysis
Type of Data Used

to Construct
Social Contagion
Variable
Internet grocery
retailer
Pharmaceuticals
Pharmaceuticals
Context
Table 1: Selective list of studies related to social contagion.
Goolsbee and
Klenow (2002)
Sorensen (2006)
Manchanda et al.
(2008)
This Study
Berndt et al.
(2003)
Bell and Song
(2007)
Van den Bulte and
Lilien (2001)
Coleman et al.
(1966)
Burt (1987)
Paper

897
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As mentioned earlier, in our context of PCs, Goolsbee and Klenow (2002)

have demonstrated that consumers are more likely to buy their first PC if a high
fraction of people around them own computers. Following this precedence, we
use the information on the choices, and geographic proximity to others making
similar choices, for a panel of consumers to construct a measure of social contagion. Before we present the details of our operationalization of the measure, we
briefly explain the challenges in modeling contagion using behavioral data and
how our operationalization and econometric specification adequately overcomes
these challenges.
Assume that a researcher demonstrates that consumers choice behavior (in
our context, choices of brand, retailer, and channel) is driven by their neighbors
behavior. For the researcher to attribute the choices to this social effect, it is imperative to rule out the effect of other confounding factors. Because an econometrician
who is working with behavioral data such as ours infers contagion and does not
usually have access to the actual interaction between consumers in a geographical area, it is important to account for factors other than contagion that might
make the behavior of neighbors similar. Manski (1993, 2000) identifies three potential causes of similarity in behavior: endogenous effects, contextual effects,
and correlated effects. Our substantive interest is in the endogenous effect, which
in our context, would exist, if ceteris paribus, the probability of a consumers
brand purchase behavior (channel or retailer choice behaviors) varies with the
brand purchase behavior (channel or retailer choice behaviors) of people living
in her geographic proximity. Contextual or exogenous effects can arise due to
the particular context or geographic region that is being studied. Examples where
actions of an individual depend on such exogenous characteristics may include
the religion or racial composition of the geographic region that make the region
a statistical outlier. Correlated effects arise when unobserved institutional factors
make the agents behave in a similar fashion. Because these factors are unobserved,
an econometrician who does not control for such factors will wrongly attribute
the choice behavior to social contagion. In our context, examples of unobserved
institutional factors can be exogenous supply side factors such as the distribution
intensity of a particular brand in a specific geographic region. If a brand happens
to have a better distribution network in a region, then more consumers will buy
that brand. Similarly, demand shocks, such as an increase in price of a competing brand could make consumers buy a particular brand. Such unobserved factors
would cause the choice behavior of all the consumers to be correlated, which could
lead to a conclusion that these consumers are behaving similarly due to geographic
proximity, when in fact their behavior is driven by the unobserved factors. In sum,
it is important to be able to control for both contextual and correlated factors that
can confound with the effect of contagion.
There are two other caveats in modeling contagion that are presented by the
literature. First, social contagion at the microlevel was first empirically demonstrated in the classic study by Coleman, Katz, and Menzel (1966), who found
evidence of physicians adopting a new antibiotic drug due to their interactions
with other physicians. Although the study was credited with documenting diffusion as a social process (Rogers, 1995), a later study by Van den Bulte and
Lilien (2001), using the same data as the original study by Coleman et al. (1966),
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demonstrated that once the firms marketing efforts are controlled for, the contagion effect becomes insignificant. Thus, it is critical to control for marketing
communication efforts undertaken by the relevant firms. Second, models that rely
on behavioral data use the mean choice behavior of the reference group to operationalize the contagion variable. However, an identification problem, also referred
to as the reflection problem, arises if one cannot distinguish whether individual choice behavior affects the groups choice behavior, or if the groups choice
behavior actually affects the individuals choice behavior (Manski, 1993).
In our study, to avoid the issue of contextual effects, we focus on a number
of geographic regions ranging from densely populated areas like New York City
and Los Angeles to such geographically dispersed areas as Cincinnati, Hartford,
CT, Memphis, and Salt Lake City. The mix of these diverse regions from the
different parts of the United States will help make sure that geographic proximity
effects, if found, are not due to a specific geographic region. One could also
potentially argue for endogenous selection, wherein consumers with similar tastes
for different PC brands or retailers self-select to live in the same region. Although
such a possibility is very remote, one needs to mitigate the bias due to any such
selection problems. Prior studies have argued for and implemented lagged group
behavior to overcome bias due to unobserved common traits that are shared by
the consumers in a geographic area, and we do the same (Bell & Song, 2007;
Goolsbee & Klenow, 2002). In our context, the temporal separation in the choice
behavior of an individual and the choice behavior of those living in geographic
proximity (the reference group) lets us argue that the reference group consists of
people who are inherently different from consumers, thereby mitigating the bias
due to unobserved common traits. Following this stream of literature, we model
contagion for consumer i in time period t by the proportion of consumers who
had bought a PC in the earlier time period, (t 1). We further elaborate on this
specification in the next section, but we note that the lagged choice is the choice
made by other consumers in the previous time period and thus is very different
from consumers inertia (choice made by the same consumer in the previous time
period). With respect to the correlated unobservable factors, we account for both
geographic-regionspecific effects and time-specific effects by incorporating the
appropriate fixed effects formulation.
We also control for both advertising and price of the alternatives available
in all three aspects of decision making. We complement our PC purchase data
with advertising data at both the national and the local level to control for the
firms marketing-mix efforts. A designated market area (DMA) is a group of
counties in the United States that are covered by a specific group of television
stations and we use advertising at DMA level as a measure of local advertising. The term DMA was coined by Nielsen Media Research, and they control
the trademark on it. We develop a hedonic price regression model that relates
the price of a PC to various observed quality characteristics. We create and use
quality-adjusted price indices for the various brands, retailers, and channels for
each of the metropolitan regions in our model. To account for the reflection problem, we leverage the dynamics in the data and test whether individual consumer
choice behavior varies with lagged, instead of contemporaneous, values of group
mean choice behavior (Manski, 2000). Manchanda et al. (2008) also argue for and
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implement a similar specification in their paper to overcome the reflection problem.

Finally, to control for consumers unobserved heterogeneity, we allow for the consumers heterogeneous preferences for the various brands, channels, and retailers,
and for their sensitivities toward our focal variables of contagion, namely brand-,
retailer-, and channel-related contagion using a random coefficient specification.
We believe we make a comprehensive effort to test for proximity effects while
accounting for most of the challenges previously identified by researchers in this
area.
DATA SOURCES AND VARIABLES

We have two primary sources of data. The purchase and price data come from
the 2001 Forrester North American Technographics Benchmark survey. This survey is conducted by Forrester Research Co. every year to track trends in usage
and purchase of a variety of high-tech products (like computers, accessories, and
DVD and MP3 players) and services (broadband access, online buying, and banking) from tens of thousands of U.S. and Canadian customers. Although the exact
sampling method is proprietary, Forrester strives to maintain a nationally representative sample of consumers. The survey is the largest survey in the world that
is available to study consumer attitude and use of technology, and is commonly
used by consumer and technology marketing companies for product planning and
go-to-market strategy assessments (Business Wire, 2008). The survey has information on the brand of PC respondents bought, the price paid, and how and where
they bought the PC. To select our estimation sample of PC buyers, we apply the
following criteria: (i) they have to report buying a new PC of one of the top seven
brands (totaling about 70% market share) within the three preceding years. This
constraint is required so we can estimate a model conditional on purchases; (ii)
they have to buy a new computer from one of the four common types of retailers
which includes electronics stores like Best Buy, discount stores like Target, direct
purchase from manufacturers like Apple or Dell, and computer stores like Comp
USA; and (iii) they have to live in the top 26 metropolitan areas of the United
States. We needed this filter to make sure we could track advertising data for these
markets for the top brands and retailers. We exclude areas that are much smaller
from our analysis because they do not have enough brand-specific purchases per
year to reliably derive either the contagion measure or the hedonic price index,
both of which are described later in this section. Applying the above, our estimation sample included a total of 10,892 PC buyers. Out of this total sample, we
keep a total of 9,538 consumers from 20 DMAs as the calibration sample, and the
remaining 1,354 consumers from the remaining 6 DMAs as a hold-out sample to
assess the predictive performance of our proposed model.
The advertising data for our study come from the AD$pender service of the
market research company TNS Media Intelligence. This service comprehensively
tracks advertising expenditures in local as well as national media markets. We note
that although these data are at a highly disaggregated (individual brand campaign)
level by virtually all marketers of any type in the U.S. market, the advertising data
are not at the individual consumer level. Summary statistics about the brands and
901
Table 2(a): Summary statistics for brands.

Brand
Brand Share (%)
National
Advertisement
Total Local
Advertisement
5.08
22.08
16.92
21.73
23.30
6.67
4.22
93.2
131.6
127.9
158.1
117.5
47.6
22.2
13.2
8.9
11.8
50.2
6.5
13.2
0.01
Apple
Compaq
Dell
Gateway
HP
IBM
Packard-Bell
Table 2(b): Summary statistics for retailers.
Place
Discount stores
Direct from manufacturer
Computer and office stores
Electronics store
Place Share (%)
National
Advertisement
Expenditures
Total Local
Advertisement
Expenditures
5.96
35.51
31.57
26.96
421.2
286.0
119.2
192.4
309.5
62.0
121.9
376.0
Notes: In both panels, advertising expenditures are in millions of dollars. National advertisement is the average for the years 19982000. Local advertisement is the average for the
years 19982000 of total local media expenditure in the 26 included DMAs only.
retailers and their market shares in the total sample with advertising expenditure
by category (in millions of dollars) are given in Tables 2(a) and (2b).
The two types of purchase channels that we consider are physical retailers,
and any remote channel (e.g., online, catalog, phone, fax, etc.), which account for
69.5% and 30.5% of all purchases, respectively, in our dataset; we did not separate
online as a distinct channel because it accounts for less than 3% of purchases in
our sample. Next we discuss the operationalization of the variables that we use in
our model: brand, place, and channel choice.
Geographic Proximity Variables

As explained earlier in the section, consistent with the prior literature we model
the choices related to consumer i at time t as the proportion of neighbors choices
in time period (t 1). Unlike the earlier studies (e.g., Roberts & Urban, 1988) that
suggest that all potential adopters are influenced by the same proportion of the
cumulative adopters at the time of adoption, we follow the recent studies that have
used the following definitions of geographic neighbors. Goolsbee and Klenow
(2002) define neighbors as those who live in the same city as the focal consumer.
Bell and Song (2007) consider residents of surrounding zip codes, which will be
less than 10 miles in a typical urban area, to be neighbors, while Manchanda et
al. (2008) use a 20 mile radius for the New York City market. Following these
studies, we define neighbors as those who live within a 010 mile radius (which,
902
on an average, corresponds to up to 30 minutes of driving). Because we look at

a variety of metropolitan areas, most of them smaller than New York City, our
use of a radius smaller than 20 miles is appropriate. One could potentially let the
radius vary across different cities. In an effort to keep the model parsimonious, we
keep the definition of a neighborhood constant across the different cities. However,
we performed sensitivity analyses by changing our definition of neighborhood to
a radius of 5 miles and 15 miles and found our results to be substantively the
same.
Based on our definition of what constitutes a neighborhood, we define the
brand j related geographic proximity for consumer i at time t as the proportion
of consumers who bought brand j in time period (t 1). In a similar vein, we
formulate channel- and place-related proximity as a proportion of consumers who
bought a computer (of any brand) the previous time period (t 1) via the same
channel and the same place, respectively. To obtain the measure, we proceeded as
follows: Our data identify zip code information for each PC buyer. For each buyer
in year t, we identify buyers living within 10 miles of the geographic centroid of
her zip code in year (t 1). We use commercial geocoding software, available
from zipinfo.com, to find the distance between geographic centroids of the zip
codes to identify these buyers. Finally, brand shares (similarly channel shares or
place shares) of all the relevant neighbors in year (t 1) are used as the relevant
contagion measures. We note that all three contagion measures of brand, place, and
channel are consumer (and time) specific. We also note that while our measure can
not explicitly account for differential influences of certain opinion leaders on
others and of others on them, our modeling does allow for the differential impact
of contagion on consumers choices by accounting for unobserved heterogeneity
in the effect of contagion across consumers. The summary statistics of the brand-,
place-, and channel-related proximity measures are given in Tables 3(a) to 3(c),
respectively. Although the average values reported for the measures across all
consumers track the market share of the brand (retailer, channel), the relatively
high standard deviations indicate substantial variation across consumers in the
proportion of consumers in their neighboring areas opting for the brand, retailer,
or channel. Thus these measures simply do not seem like proxies for high market
share at the individual level.
Table 3(a): Summary statistics of brand-related social contagion effects.

Brand
Apple
Compaq
Dell
Gateway
HP
IBM
Packard-Bell
Social Contagion Effects

0.074 (0.105)
0.176 (0.140)
0.114 (0.117)
0.173 (0.172)
0.147 (0.144)
0.102 (0.099)
0.061 (0.073)
903
Table 3(b): Summary statistics of place-related social contagion effects.

Place
Discount stores
Direct from manufacturer
Computer and office stores
Electronics store

0.041 (0.056)
0.276 (0.1999)
0.369 (0.214)
0.250 (0.234)
Table 3(c): Summary statistics of channel-related social contagion effects.

Channel
Store purchase
Remote purchase

0.708 (0.218)
0.279 (0.204)
Notes: The measures presented above in Table 3 parts (a), (b), and (c) are the averages across
all 26 DMAs and all time periods. The corresponding standard deviations are presented in
parentheses.
Advertising
The AD$pender service tracks advertising in about 13 local (by DMA) media such
as local TV, radio, and flyers in newspapers as well as in national media like network
TV and national magazines by each brand and campaign. We pulled reports for
computer brands (Dell, HP, etc.) and for all the retailers significantly involved
in selling PCs (Circuit City, Best Buy, Office Depot, and also mass merchants
including Wal-Mart and Target) for the relevant calendar years. To get retailer type
advertising, we had to combine advertising done by all relevant companies. For
example, advertising expenditure by mass marketers would sum up expenditures
by the likes of Target, Wal-Mart, K-Mart, and Ventures. As noted earlier, we do
not measure advertising exposure at the individual consumer level, but attempt
to proxy this by the expenditure at the individuals DMA. Our focus here is not
on consumers response to advertising, but to account for marketing efforts in
the best way possible, while measuring their response to the different contagion
measures. As mentioned before, average levels of advertising expenditures are
presented in Tables 2(a) and 2(b). It is interesting to note that while most of the
brand advertising is spent on national level advertising, a much higher proportion
of retailer advertising is spent in local media.
Price
Because PCs are very heterogeneous products varying greatly in terms of their
observed characteristics (such as clock speed, amount of storage, and accessories
that make up the configuration of a PC), even within the same brand, the transaction
price reported for the computer is not a very accurate reflection of the price of that
brand (or channel and place). Additionally, these transaction prices can vary across
DMAs and time. Because cross-market price data on individual goods and across
time is rare, we follow the procedure suggested by Goolsbee (2001), and employ
904
the hedonic price framework to estimate hedonic brand price indices for each
of the brands (DMA specific) and for each of the time periods. We explain log
prices of the computers as a function of the dummies for the seven brands for each
DMA (i.e., DMA-specific brand dummy), time (year) dummies, and dummies for
the different observed characteristics of the quality of the PC. The characteristics
include modem, graphics card, expanded hard drive, DVD drive, CD-ROM drive,
CD writer, external memory, and broadband adapter. The specification of the
hedonic brand price regression model that we estimated is as follows:
1
ln(priceidt ) = di
DMA Branddi + t2 Time + 3 Modem + 4 GraphicsCard
+ 5 ExplandHDD + 6 DVDDrive + 7 CDROMDrive

+ 8 CDwriter + 9 ExternalMemory + 10 Broadband + idt ,
(1)
1
and t2 are the parameters associated with DMA (d), specific brand
where di
(i), dummies (DMA_Branddi ), and time dummies (Time), respectively; 3 to 10
are the rest of the parameters that are associated with the appropriate observed
characteristics of the PC; and idt is the error term.
1
Two points about di
and t2 (the DMA-specific brand dummies and year dummies, respectively) need special mention. First, because there are seven brands and
26 DMAs, we have a total of 150 DMA-specific brand dummies. Following the
study by Goolsbee (2001), the dummy parameters associated with each of the
DMA-brand combinations in these regressions are then used as price indices for
each of the brands in each location. We incorporate time dummies because the purchases reported in the 2001 survey were spread over 3 years (19982000) and hence
separate dummies for separate years could account for any common unobservable
factors that might affect the price of the different brands, thus affecting consumers
choice over time in a systematic manner. Secondly, because these quality-adjusted
price indices are brand/region specific, obtained after controlling for the effect
of time-specific factors, the price indices that we estimate help account for all
the brand-/region-specific and time-specific unobserved factors keeping our joint
model of brand, retailer, and channel parsimonious and tractable. As explained
earlier in the subsection on modeling geographic proximity effects, accounting for
these unobservable factors is important in getting unbiased estimates of contagion.
With respect to the results of the price regression model for brand, most of the
coefficients are significant and in the expected direction. We found the coefficients
associated with graphics card, expanded hard drive, broadband adapter, external
memory, CD writer, and DVD drive to be positive, significant and increasing in
magnitude in that order, thus explaining the intuitive importance of these characteristics. The R2 of the model is 0.30. For comparison purposes, Goolsbee (2001)
reports R2 values in the range of 0.14 to 0.16. Among the 150 DMA-specific brand
dummies, 92 were significant with the absolute value of the t-statistic greater than
1.65 (p-value of .10). The two time dummies were significant with the t-statistic
greater than 7.00. The time dummy associated with year 1998 is greater than the
one associated with year 1999 (the base case was year 2000). This indicates that
the prices of PCs decrease with time which is consistent with the notion that prices
of technology products fall over time.
905
To calculate hedonic prices for places and channels for each of the DMA
regions, we similarly estimated a hedonic price regression for each, controlling for
observed PC characteristics, the various PC brands, and time dummies. The R2 for
the hedonic place price and hedonic channel price models are 0.291 and 0.296,
respectively. The coefficients associated with the various PC characteristics for
both models are consistent with the hedonic brand price regression model. With
respect to the various retailers, we find that (in comparison to the electronic stores,
the base case) the prices of PCs bought directly from the manufacturer are the
highest, followed by those bought at computer and office stores. As expected, the
prices of PCs at the discount stores are the lowest. These results present evidence
of face validity in the results of the hedonic regression models. An interesting
result from the hedonic channel price regression is that the average price of PCs
bought in physical stores is lower than that of PCs bought online. Thus at least
in early years of online shopping, prices in the online channels were not lower
than prices in retail stores. Finally, because the price was modeled in log scale
(in Equation 1), we take the exponent of these parameters before we use the
hedonic price indices in the choice models. Some parameter estimates from the
three hedonic price regressions are reported in Table 4. The price indices of the
various PC brands, retailers and channels for the different DMAs are presented in
Table 5.
Table 4: Hedonic price regressions for brands, retailers, and channels.
Variable
Monitor
Memory
Expanded hard drive
Modem
Graphics card
Broadband
DVD drive
CD-ROM
External storage
CD writer
Year 1998
Year 1999
Estimates of
Hedonic Brand
Price Regression
Estimates of
Hedonic Place
Price Regression
Estimates of
Hedonic Channel
Price Regression
0.026
0.003
0.029
0.004
0.020
0.034
0.185
0.014
0.065
0.102
0.157
0.057
0.026
0.007
0.023
0.006
0.019
0.034
0.200
0.020
0.068
0.085
0.144
0.053
0.030
0.010
0.025
0.012
0.027
0.029
0.219
0.020
0.070
0.068
0.142
0.054
Notes: The R2 for the hedonic brand, place, and channel regressions are 0.30, 0.291, and
0.296, respectively. In all three regressions, the dependent variable was log of price paid.
All the covariates are dummy variables.
The hedonic brand, place, and channel regressions model included the DMA-brandspecific
dummies, DMA-place specific, and DMA-channelspecific dummies that are not reported
here. Price indices created from these dummies are reported in Table 4.
p .05, p .01, p .001.
1.235
1.230
1.290
1.174
1.225
1.159
1.277
1.324
1.046
1.252
1.009
1.245
1.248
1.077
1.445
1.140
1.089
1.003
0.944
1.193
1.190
1.140
1.185
1.136
1.249
New York
Los Angeles
Chicago
Philadelphia
Washington
Boston
Minneapolis
Detroit
Cleveland
San Francisco
Dallas
Pittsburgh
Houston
Atlanta
Tampa
Seattle
Denver
Baltimore
Phoenix
St. Louis
Portland
Hartford
Sacramento
San Diego
Milwaukee
1.001
1.009
0.984
1.001
1.110
0.953
1.125
1.020
1.087
1.031
1.040
1.077
1.005
1.015
1.016
0.988
1.129
0.975
1.017
1.021
0.997
0.991
1.133
1.006
1.037
Compaq
1.420
1.407
1.381
1.335
1.392
1.370
1.356
1.363
1.434
1.407
1.360
1.393
1.441
1.498
1.455
1.440
1.366
1.450
1.481
1.402
1.444
1.406
1.373
1.344
1.435
Dell
1.359
1.399
1.392
1.344
1.350
1.350
1.347
1.364
1.366
1.366
1.389
1.378
1.385
1.409
1.227
1.464
1.439
1.411
1.435
1.454
1.330
1.448
1.378
1.290
1.374
Gateway
1.056
1.011
1.064
1.045
1.122
1.041
1.063
1.092
1.009
1.068
1.028
1.012
1.110
0.969
0.999
0.931
1.078
1.075
1.042
1.020
1.034
0.983
1.043
1.049
1.102
HP
1.189
1.006
1.243
1.070
0.965
1.354
1.031
1.116
1.141
1.000
1.126
1.093
1.043
0.905
1.036
1.023
0.670
1.189
1.145
1.007
1.019
1.032
0.961
1.223
1.097
IBM
0.936
0.941
0.918
1.061
0.883
0.859
0.928
0.877
1.029
0.983
0.865
0.870
1.005
0.848
0.934
0.943
0.840
0.972
0.888
0.884
0.907
1.180
0.978
0.953
0.908
Discount
Stores
1.315
1.301
1.333
1.256
1.296
1.268
1.282
1.281
1.314
1.279
1.218
1.343
1.199
1.351
1.209
1.341
1.347
1.324
1.358
1.357
1.303
1.322
1.243
1.263
1.347
Direct from
Manufacturer
Retailers
1.050
1.082
1.102
1.035
1.119
1.012
1.032
1.026
0.985
1.074
1.074
1.053
1.030
1.032
1.026
0.972
1.084
1.040
0.984
1.057
1.029
1.017
1.099
1.006
1.032
Computer &
Office Stores
0.821
0.809
0.836
0.828
0.862
0.791
0.826
0.841
0.811
0.821
0.813
0.819
0.814
0.795
0.784
0.778
0.820
0.820
0.780
0.834
0.796
0.829
0.834
0.790
0.805
In-Store
Channel
Notes: The price indices are created by taking the exponential of the parameters estimated from the hedonic price regression models.
The price index of the Packard-Bell brand was normalized to 1. The price indices of all the brands in one of the DMAs (Orlando) were normalized to 1. This facilitated comparison
of prices across brands in a particular DMA and prices of PC brands across DMAs, respectively. Similarly, the price indices of electronic store retailers and remote channel were
normalized to 1.
Apple
DMA
Brands
Table 5: Estimated hedonic price indices for PC brands, retailers, and channel by DMAs.
906
907
ECONOMETRIC MODEL
Our goal is to examine the effect of contagion on consumers decisions of what
brand to buy, where to buy, and how to buy. To accomplish this, we develop a
discrete choice model for each of the three decisions that we estimate jointly.
In the following, we discuss the model development steps. We first discuss the
consumers utility function and the various variables associated with the three
decision-making processes and then present the estimation procedure.
Joint Discrete Choice Model and Consumers Utility Specification

As outlined earlier, we develop a joint model of consumers three decisions of
what brand (j) to buy, which place (p) to buy from, and which channel (c) to use.
Let the consumer is (i = 1, . . . , I) utility from the combination of choosing brand
j (j = 1, . . . , J), place p (p = 1, . . . , P), and channel c(c = 1, . . . , C) be given by
i
Ucpj
. Accordingly, the consumer will choose the combination (cpj), if and only if
the utility from the combination is higher than that of any other combination,
i
> Uci p j (cpj ) = (c p j ).
Ucpj
(2)
This implies that the probability of consumer i choosing the combination (c,
p, j), Pri (c, p, j ), is given by
i

Pri (c, p, j ) = Pr Ucpj
> Uci p j (c, p, j ) = (c , p , j ) .
(3)
To write the choice probability in Equation (3) in a more estimable and
interpretable format, we conceptualize the purchase decision of a consumer as
follows. The consumer first decides which channel c to use. Conditional on the
choice of channel c, the consumer then decides which place p to buy from, and
finally, conditional on the choice of a channel c, and place p, the consumer then
i
decides which brand j to buy. Therefore, the joint utility Ucpj
can be partitioned
i
into three parts: (i) a part labeled Vc that is constant for all places and brands for
i
a particular channel, (ii) a part Vp|c
that varies across all places, and (iii) a part
i
Vj |p,c that varies across all brands. We do not include the time period (t) here in
the notation for expositional ease. Our final utility specifications that we present in
i
the following subsection will have a subscript for time period (t). We specify Ucpj
as follows:
i
i
i
Ucpj
= Vci + Vp|c
+ Vji|p,c + cpj
,
(4)
i
where cpj
is the stochastic term that represents a consumers utility that is not
i
, and Vji|p,c . This assumption, however, does not mean that
captured by Vci , Vp|c
consumers necessarily have to make decisions in this order. The conceptualizai
are i.i.d. extreme value distributed)
tion (under the common assumption that cpj
helps us decompose the unconditional probability in Equation (3) into a product
of marginal probability and two conditional probabilities, all in estimable logit
formats.
Accordingly, the joint probability Pri (c, p, j ) can be now written as:
Pri (c, p, j ) = Pri (c) Pri (p|c) Pri (j |p, c),
(5)
908
where the three individual probability expressions are given as follows:

exp(Vc + I Vpi )
Pr (c) =

,
exp Vc + I Vpi
i
(6)
exp(Vp|c + I Vji )
Pri (p|c) =
,

exp VP |c + I Vji
(7)
pAc
and
exp(Vj |p,c )
Pri (j |p, c) =
.
exp(Vj |p,c )
(8)
j Bp,c
The expressions I Vpi and I Vji , commonly referred to as the inclusive values
or log-sum terms, link the upper and lower models by using information from the
lower model in the upper model (Ben-Akiva & Lerman, 1985). Thus, I Vpi and I Vji
represent consumer is expected utility of choice of all the places in a particular
channel, and of all the brands in a particular place, respectively. These can be
expressed as follows:

i
,
(9)
exp Vp|c
I Vpi = ln
p
I Vji = ln

exp Vji|p,c .
(10)
We note that the purpose of allowing for the three nests is not to alleviate the
restrictive assumption of independence from irrelevant alternatives (IIA) present
in standard logit models, but to explicitly account for structural constraints that
are prevalent in this industry. For example, some brands (Dell, during our study
time period) may sell only directly to consumers, while many other brands (like
HP) may be bought directly from the manufacturer, remotely using a catalog, via
an online retailer, or by physically visiting one of the many types of retailers that
carry this brand. Therefore, in our case, the option to purchase a Dell PC would
appear only under the remote channel nest and not under the retail channel nest.
To alleviate the IIA assumption and to facilitate the modeling of a more general
substitution pattern, we adopt a random coefficient formulation, which is discussed
in the next section.
Consumers Utility Specification and Estimation Procedure

Brand choice
As outlined earlier, the brand choice of a consumer is influenced by the
brand-related social contagion factor and the marketing-mix factors. Among the
marketing-mix factors, we focus on price and advertising. Therefore, we specify
909
the deterministic component of utility of consumer i, who lives in the geographical

area d, for brand j at time t, Vjidt as follows:
i
Vjit = 0j
+ 1 Pricej dt + 2i BrandContagionij t
+ 3 BrandContagionij t Inexperiencei + 4 LocalAdj dt + 5 NationalAdj t ,

(11)
where Pricejdt is the hedonic price index of brand j in area d at time t; BrandContagiontijt measures the brand j related social contagion for consumer i at time t,
LocalAdjdt is the local advertisement of brand j in area d at time t (measured in
millions of dollars), NationalAdjt is the national advertisement of brand j at time t
(measured in millions of dollars), and Inexperiencei is an indicator variable that is
equal to 1 if the consumer i is buying a computer for the first time, and 0 otherwise.
In Equation (11), 1 to 5 are the various response parameters (related to brand
choice) to be estimated, and 0j represents the vector of brand constants (inherent
preference that consumers have for the different PC brands). As noted earlier,
the hedonic price indices of brand j in DMA d at time t helps to account for all
the brand-/region-specific and time-specific unobserved factors in a parsimonious
manner. With respect to the effects of advertising, we note that because we do
not have data spread over many time periods, we do not model for the short- and
long-term effects (`a la Nerlove-Arrow formulation) of advertising.
Place choice
Similar to the brand choice model, the deterministic component of utility of coni
sumer i who lives in the geographical area d, for channel p at time t, Vpdt
is
specified as follows:
i
Vpti = 0p
+ 1 Pricepdt + 2i PlaceContagionipt
+ 3 PlaceContagionipt Inexperiencei + 4 LocalAdpdt + 5 NationalAdpt ,

(12)
where Pricepdt is the hedonic price index of place p in area d at time t, PlaceContagionipt measures the place p related social contagion for consumer i at time
t, LocalAdpdt is local advertisement of place p in area d at time t (measured in
millions of dollars), and NationalAdpt is the national advertisement of place p at
time t (measured in millions of dollars). In Equation (12), 1 to 5 are the various
response parameters (related to place choice) to be estimated, and 0p represents
the vector of place constants (inherent preference that consumers have for the
different places or retailers).
Channel choice
The deterministic component of utility of consumer i, who lives in geographical
i
area d, for channel c at time t, Vcdt
is specified as follows:
i
+ 1 Pricecdt + 2i ChannelContagionict
Vcti = 0c
+ 3 ChannelContagionict Inexperiencei ,
(13)
910
where Pricecdt is the hedonic price index of channel c in area d at time t and
ChannelContagionict measures the channel c related geographic proximity effects
for consumer i at time t. In Equation (13), 1 to 3 are the various response
parameters (related to channel choice) to be estimated, and 0c represents the vector
of channel constants (inherent preference that consumers have for the different
channels). Prior studies (e.g., Brynjolfsson et al., 2009; Forman et al., 2009) in
the ecommerce literature have established that local market structure as measured
by the number of local brick-and-mortar stores can drive consumers decision to
shop online versus offline. The hedonic channel price covariate in the channel
choice model, Pricecdt , helps indirectly account for the effects of market structure
in a particular location. Recall that hedonic channel price regression computes the
price of PCs sold online versus offline at a particular location, after controlling for
various characteristics of PCs and the brands of PC (and time dummies as well).
If there is any difference in the price of an equivalent PC across the channels in a
location, it could be attributed to the market structure in that location. Secondly,
by modeling choice of a particular type of retailer from a set of all retailer types
(i.e., where to buy) and estimating consumers choice of what to buy, where to
buy, and where to buy jointly, we believe we are able to account for offline channel
competition in the form of the number of retailer types in a particular market.
To account for consumers unobserved inherent preferences for the different brands, places, and channels, we adopt a random coefficient approach. More
i
i
i
specifically, we allow = [0j
0p
0c
2i 2i 2i ] , the vector of parameters associated with brand, place, and channel constants and the effect of the three contagion
measures pertinent to the three choices, to be normally distributed; in other words,
N(,

), where and
are the vectors containing the mean and the matrix
of variance of the three sets of parameters, respectively. In the variance matrix,
we allow for possible correlation between the three geographic proximity effects
parameters. The likelihood of observing consumer i making the observed choice
of (c, p, j), Li (), is given by the following:
L () =
i
P
J
C

{Pri (c, p, j )()}cpj f (|) d(),
(14)
c=1 p=1 j =1
where represents all the utility parameters to be estimated, represents the

i
underlying parameters (i.e., the mean and variance terms) of , and cpj
is a
consumer level choice indicator variable that is equal to one, if consumer i buys
brand j via place p and channel c, and zero otherwise. The data log likelihood
across all consumers in the sample, LL(), is then given by
LL() =
I

i=1
ln
P
J
C

i
cpj
{Pri (c, p, j )()}
f (|) d().
(15)
c=1 p=1 j =1
Because the log-likelihood function given in Equation (15) involves integrals

over the state space of the parameters, we adopt a Monte Carlo simulation approach
and estimate the model via simulated maximum likelihood (Train, 2003).
911
RESULTS
In this section, we present the comparison of our proposed model with that of
alternative models and the results of the parameter estimates of the proposed
model.
Model Comparison
To benchmark the fit of our proposed joint model that incorporates the geographic
proximity effects on the three choices, we estimated two models: In Model 1,
we included only the marketing-mix variables. In Model 2, we added the social
contagion effects (Model 2 includes all the hypothesized proximity effects and
their interaction terms with the inexperience dummy). Analyzing the Bayesian
information criterion (BIC) of the two models (34,533.67 for Model 2 versus
34,707.73 for Model 1) suggests that our joint model that accounts for geographic
proximity effects fits the data better. This is also in conformity with the likelihood
ratio test which favors Model 2 over Model 1. The likelihood improvement of
Model 2 over Model 1 is significant as the statistical 2 is 430.6 in comparison to
2
of 21.67.
the critical (9,0.01)
To test the predictive validity of our proposed model, we predict the brand,
place, and retailer choices of 1,354 consumers from six DMAs which are not part
of the calibration sample. We point out that using the estimated parameters to
predict the choices of different consumers from different DMAs would be a more
stringent test of the model than to predict choice of different consumers who reside
in the same DMAs used in the calibration sample. Both the likelihood value and
BIC comparison suggest that our proposed model that incorporates geographic
proximity effects is better than the model that does not account for geographic
proximity effects on both in-sample fit and prediction criteria. The in-sample
and out-of-sample fit statistics of the two models are presented in Table 6. The
parameter estimates of the two models are presented in Table 7. Because it has the
best fit, we discuss the parameter estimates of Model 2.
Table 6: Fit statistics of Model 1 versus Model 2.

Model Fit
In-samplea
LL
BIC
Out-of-sampleb
LL
BIC
a
Model 1 (Without Social

Contagion Effects)
Model 2 (With Social

Contagion Effects)
34,572.87
34,707.73
34,359.57
34,533.67
5,870.87
5,975.43
5,818.57
5,955.58
A total of 9,538 observations from 20 DMAs.

A total of 1,354 observations from 6 DMAs.
Notes: LL, Log likelihood; BIC, Bayesian information criterion given by BIC = LL + (k/2)
ln(n), where k is the number of parameters and n is the number of observations.
b
912
Table 7: Parameter estimates of the joint models of brand choice, retailer, and
channel choice.
Parameter
Brand price coefficient
Brand contagion effect coefficient
Std. dev. of brand contagion effect
coefficient
Brand contagion effect
inexperience dummy
Local brand advertisement coefficient
National brand advertisement
coefficient
Place price coefficient
Place contagion effect coefficient
Std. dev. of place contagion effect
coefficient
Place contagion effect inexperience
dummy
Local place advertisement coefficient
National place advertisement
coefficient
Channel price coefficient
Channel contagion effect coefficient
Std. dev. of channel contagion effect
coefficient
Channel contagion effect
inexperience dummy
Correlation between brand and place
contagion effect coefficients
Correlation between brand and
channel contagion effect
coefficients
Correlation between place and
channel contagion effect
coefficients
Inclusive value for place nest
Inclusive value for channel nest
Model 1 (Without Social

Contagion Effects)
Model 2 (With Social

Contagion Effects)
.803
.14
2.03
.353
0.561
.067
2.55
1.03
.049
1.25
.832
1.24
1.02
.156
.012
.339
.008
.039
3.06
2.24
.424
.171
.128
.33
.29
.12
.41
.29
.43
.29
p .05, p .01, p .001.
Parameter Estimates
The results suggest that contagion has a positive and significant effect on consumers brand choice ( 2 = 2.03, p < .0001), place choice ( 2 = 1.24, p < .0001),
and channel choice ( 2 = .424, p < .001), thereby finding support for H1a, H1b,
and H1c. In other words, our model suggests that proximity effects play a significant
913
role in influencing consumers choice of what brand of computer to buy, where to

buy it, and how to buy.
Turning our attention to the interaction hypotheses about inexperienced consumers, we find that H2a, H2b, and H2c are all supported. In other words, contagion plays a larger role in inexperienced consumers brand choice ( 3 = .561,
p < .0001), place choice ( 3 = .156, p < .0001), and channel choice ( 3 = .128,
p < .05), respectively. With respect to the correlation between the three proximity effects, the parameter that corresponds to brand-related effects is positively
and significantly correlated with the parameter of retailer/place proximity effects.
However, the parameter that corresponds to channel geographic proximity effects
is not significantly correlated with the parameters associated with the brand- and
place-related proximity effects.
The results of the effects of marketing-mix variables on the three choices are
straightforward to interpret. For the brand choice, we find the coefficient of brand
(hedonic) price to be negative and significant, and the coefficients of both national
and local (DMA) level brand advertisement to be positive and significant. With
respect to choice of place, we find the coefficient of place (hedonic) price to be
significant and negative. Although the effect of DMA level advertisement on place
choice is significant, the effect of national level advertisement is not significant. For
the channel choice, the coefficient of the channel price has the expected negative
sign. Finally, the two inclusive value terms are significant, which supports the
proposed nested structure.
After testing and finding support for the two sets of hypotheses proposed
earlier, we find it interesting to compare the magnitudes of the brand-related contagion effects to the place- and channel-related contagion effects. Prior literature
has documented another way of distinguishing risks associated with a product,
namely inherent and handled risks (Bettman, 1973). Whereas the former refers
to the before or initial degree of risk in a purchase situation, the latter is the
after or residual risk facing the consumer after applying risk reduction strategies. Among the three choices of brand, place, and channel, regardless of where a
consumer bought a PC, or how she bought it, the consumer has to live with the risk
associated with the brand choice. In other words, post product purchase, it does
not matter how or from where a consumer bought the PC. What matters after a
product has been purchased is the actual product and thus the residual risk associated with brand choice is greater than that of either of the channel or place choice.
Consequently, we can expect brand-related geographic proximity effects to have a
greater effect on consumers brand choice than either the place- or channel-related
geographic proximity effects on their place or channel choice, respectively.
Besides the inherent economic risk, the social risk associated with the brand
choice is also likely to be greater than that of channel or place choices. Regardless
of how and where a PC is bought, because it is the choice of brand of PC that
will be explicit, it is not surprising that the brand choice is more susceptible
to contagion when compared to channel or retailer choice. If we consider the
social-normative pressure mechanism of these effects, for a consumer who takes
into account how others feel about her, it is the brand consumption that is more
apparent and available for scrutiny for a longer time period; hence, we can expect
contagion to have a greater effect on her brand choice when compared to either
914
the retailer or channel choice of the consumer. Using our estimates to statistically
compare the three geographic proximity effects, we indeed find that the brand
contagion effect is significantly greater than that of place- and channel-related
contagion. The t-statistic associated with the difference between brand contagion
and place contagion is 9.32 (with p < .05) and the t-statistic associated with the
difference between the brand contagion and channel contagion parameters is 14.94
(with p < .001).
DISCUSSION AND CONCLUSION

The objective of our study is to examine whether social contagion effects influence
consumers decisions of what to buy, where to buy, and how to buy in their product
purchase process. Using a dataset of computer purchase information for thousands
of U.S. consumers tracked by Forrester research, we developed measures based
on geographic proximity of people making similar choices, and estimated a joint
model to simultaneously analyze the proximity effects on the three consumer
decisions that make up the purchase process. In the context of our study, we
find strong evidence for geographic proximity effects across all three consumer
choices of brand, place, and channel. Among the three choices, consumers are
more influenced by those proximate to them when it comes to their brand choice,
as compared to their channel or place choice. Our findings also indicate that such
effects across these choice decisions are generally stronger for first-time buyers
than for repeat buyers.
Our findings offer important contributions to the literature on social contagion, especially the small but growing set of studies that examine its effects
using disaggregate level behavioral data. First, whereas much of the extant studies
have been concerned with the effect of contagion on adoption and diffusion of an
innovation, we analyzed the effect of social contagion on consumers choice of a
product in a relatively mature category, and in a competitive setting, where consumers choose one brand among the different alternatives. In other words, rather
than modeling the effect of social contagion on adoption versus nonadoption, we
analyzed the effect of social contagion at a brand-specific level and in the context of a familiar product category. The evidence of geographic proximity effects
under stringent conditions is a testament to the potent influence of contagion on
consumers choice behavior.
Second, our findings also indicate that geographic proximity effects across
the three choice decisions are generally stronger for first-time buyers than for those
who have prior experience with the product. Prior literature (e.g., Van den Bulte
& Lilien, 2001) has argued for different mechanisms behind the social contagion
effects such as learning (i.e., information transfer) and social-normative pressure
(i.e., keeping up with the Joneses). The differential effect of social contagion on
inexperienced versus experienced buyers helps shed light on the role of these effects
on consumers choice behavior. We argue that whereas both learning and socialnormative pressures due to geographic proximity effects would have an effect on
first-time buyers, the experienced buyers having already experienced the product
and thus its quality, are influenced primarily by social-normative peer pressures.
For example, in our context, at the brand choice level, whereas the persuasive effect
915
of contagion on experienced users is 2.03, the informative and persuasive effect for
inexperienced users is 2.591 = 2.03 + 0.561. An econometrician using behavioral
data such as ours cannot strictly distinguish between the different mechanisms
by which geographic proximity effects operate, unless the behavioral data are
complemented by self-reported survey data, which may be prone to its own bias
(such as social conformity or the opposite of it). However, comparison of the effect
of social contagion on experienced buyers versus first-time buyers can help to shed
light on how social contagion works. To the best of our knowledge, our study is
the first to offer evidence of the two different effects of social contagion using
behavioral data.
Our results also have implications for managers. First, when comparing the
parameter estimates of the marketing-mix variables of the two models, with and
without geographic proximity effects, it is evident that the effect of marketing actions like pricing and advertising can be overstated if geographic proximity effects
on consumers choice are not properly accounted for. For example, for the brand
choice component we find that consumers are indeed less price sensitive and less
sensitive to advertising; the effects of both national level and DMA-level local advertisement decreases when contagion effect is controlled for. The same is true for
the channel choice and place choice components. From a managers perspective,
this would imply that not accounting for the contagion or word of mouth effect
on consumers choice behavior can lead to a nonoptimal allocation of marketing
efforts, especially with respect to targeting of the inexperienced buyers. Second,
in the era of increasing consumer interconnectedness, even advertising giants like
Procter and Gamble are looking to tap into word of mouth with campaigns like
Tremor and Vocalpoint, which facilitate the sharing of information and experience
with a new product among different peer groups (Berner, 2006). The Marketing
Science Institute believes that Internet and recent technologies like mobile telephony increase the power of social-network effects and suggests that the effects are
more actionable than before. Our study is the first to offer empirical evidence on
the overarching effect of contagion on all aspects of consumers product purchasing behavior including choice of retailers and channels. These findings come at a
critical time as firms are now offering new channels to reach out to and acquire new
customers; additionally, marketing to multichannel shoppers has recently garnered
increased attention in the literature.
Although our study is one of the first attempts to analyze geographic proximity effects on consumers choices of what to buy, where to buy, and how to buy
in a unified framework, it is certainly not without its limitations. First, although
we account for aggregate level advertising expenditure, we do not account for
disaggregate level exposure to marketing efforts. It is difficult to obtain access
to individual consumers exposure to marketing efforts in a context where such
contagion measures can be operationalized and estimated using behavioral data.
However, access to such data can lead to a more finely grained comparison of the
effect of social contagion and marketing efforts. Second, although we establish the
differential impact of contagion on repeat customers versus inexperienced ones, it
would be interesting to understand how the impact of geographic proximity effects
change over time. One could also develop a structural model to disentangle the
informative effect from the persuasive effect of social contagion. This, of course,
916
would require information on repeat purchases of consumers and may be more

feasible in the context of a nondurable frequently purchased product category.
Third, we focus on contagion as driven by geographic proximity. Future studies
could also look into the interaction effects between social contagion effects driven
by geographic proximity and other ties that can bind people together such as gender similarity and socioeconomic similarity. One could also compare and contrast
contagion facilitated by spatial proximity and online interactions that have no geographical limitation. Fourth, one can also account for the asymmetric effects of
social contagion on consumers choice behavior. For example, opinion leaders as
compared to all peers may have a stronger effect on all three choices of brand,
place, and channel.
In conclusion, our study establishes the effect of social contagion, as measured by physical proximity on consumers decisions of what brand to buy, where
to buy from, and how to buy. We also argue for and provide evidence of the differential impact of contagion on those who do not have prior experience with buying
a particular product. Owing to higher risk associated with brand choice, we find
evidence of people relying more on their neighbors when it comes to their choice
of what brand to buy, as compared to their other two choices of where to buy from,
and how to buy. Thus, our study offers evidence of the extent to which contagion
has an effect and also of how contagion works on consumers. We hope that the
results of our study will spawn further research in this topical area.
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919
Ramkumar Janakiraman is an assistant professor of marketing and a Shelley

and Joe Tortorice 70 Faculty Research Fellow at the Mays Business School,
Texas A&M University. He has a PhD in business administration from the Marshall School of Business, University of Southern California, Los Angeles. His
research interests are primarily in the domain of econometric modeling of firm
and consumer decision making. They include structural learning models, discrete
choice models, customer relationship management, new product adoption, and new
product development. His research has appeared in journals such as Management
Science, Journal of Marketing, Journal of Marketing Research, and Information
System Research. He has a B. Tech. (honors) in metallurgical engineering from
the Institute of Technology, Varanasi (India) and an MS in materials science and
engineering from the University of Pittsburgh. He teaches graduate courses on
marketing engineering and marketing analytics and pricing.
Rakesh Niraj is an assistant professor of marketing at the Weatherhead School
of Management, Case Western Reserve University. He received his PhD at Washington University in St. Louis and was previously at USC-Marshall School of
Business. His research interests include customer relationship management, customer level strategies, and marketing of high-tech products. His work has been
published previously in top-tier marketing and management journals, including
Management Science, Journal of Marketing, Marketing Science, Journal of Marketing Research, and Journal of Interactive Marketing.

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Decision Sciences

The Impact of Geographic Proximity on

The Impact of Geographic Proximity

Subject Areas: Consumer Decision Making, Durable Goods, Geographic

Janakiraman and Niraj

The Impact of Geographic Proximity

THEORY AND HYPOTHESES

Janakiraman and Niraj

that involves risk, consumers take appropriate measures in an attempt to reduce

The Impact of Geographic Proximity

Janakiraman and Niraj

The Impact of Geographic Proximity

MODELING GEOGRAPHIC PROXIMITY EFFECTS

Personal computers Disaggregate

Personal computers Disaggregate

New and repeat

New and repeat

Type of Data Used

Table 1: Selective list of studies related to social contagion.

Janakiraman and Niraj

The Impact of Geographic Proximity

As mentioned earlier, in our context of PCs, Goolsbee and Klenow (2002)

Janakiraman and Niraj

The Impact of Geographic Proximity

implement a similar specification in their paper to overcome the reflection problem.

DATA SOURCES AND VARIABLES

Janakiraman and Niraj

Table 2(a): Summary statistics for brands.

Brand Share (%)

Table 2(b): Summary statistics for retailers.

Place Share (%)

Geographic Proximity Variables

The Impact of Geographic Proximity

on an average, corresponds to up to 30 minutes of driving). Because we look at

Table 3(a): Summary statistics of brand-related social contagion effects.

Social Contagion Effects

Janakiraman and Niraj

Table 3(b): Summary statistics of place-related social contagion effects.

Social Contagion Effects

Table 3(c): Summary statistics of channel-related social contagion effects.

Social Contagion Effects

The Impact of Geographic Proximity

+ 5 ExplandHDD + 6 DVDDrive + 7 CDROMDrive

Janakiraman and Niraj

Table 4: Hedonic price regressions for brands, retailers, and channels.

p .05, p .01, p .001.

Janakiraman and Niraj

Joint Discrete Choice Model and Consumers Utility Specification

Pri (c, p, j ) = Pri (c) Pri (p|c) Pri (j |p, c),

The Impact of Geographic Proximity

where the three individual probability expressions are given as follows:

Consumers Utility Specification and Estimation Procedure

Janakiraman and Niraj

the deterministic component of utility of consumer i, who lives in the geographical

+ 3 BrandContagionij t Inexperiencei + 4 LocalAdj dt + 5 NationalAdj t ,

+ 3 PlaceContagionipt Inexperiencei + 4 LocalAdpdt + 5 NationalAdpt ,

The Impact of Geographic Proximity

{Pri (c, p, j )()}cpj f (| ) d(),

where represents all the utility parameters to be estimated, represents the

{Pri (c, p, j )()}

Because the log-likelihood function given in Equation (15) involves integrals

Janakiraman and Niraj

Table 6: Fit statistics of Model 1 versus Model 2.

Model 1 (Without Social

{Pri (c, p, j )()}cpj f (|) d(),