Networks, Percolation, and Consumer Demand

Abstract

Understanding diffusion processes is key to market strategies as well as innovation and sustainability policies. In promoting new products and technologies, firms and governments need to understand the conditions favouring successful spread of these products. We propose a generic diffusion model based on percolation theory. Our reference is a new product diffusion in a social network through word-of-mouth. Given that consumers differ in their reservation prices, a critical price exists that defines a phase transition from a no-diffusion to a diffusion regime. As consumer surplus is maximised just below a product’s critical price, one can systematically compare the economic efficiency of network structures by investigating their critical price. Networks with low clustering were the most efficient, because clustering leads to redundant information flows hampering effective product diffusion. We further showed that the more equal a society, the more efficient the diffusion process.