Watching Your Neighbor's Driveway

It's the blueprint of many a car commercial and it goes something like this:

While mowing the lawn, Neighbor B notices the brand-spanking new car parked in Neighbor A's driveway (why a new car is not in the garage -- and protected from the elements -- is an anomaly best left to the god of commercial logic). Neighbor A comes out of his home barely able to contain his excitement over the new purchase, while Neighbor B looks on with amazement/envy.

The T.V. viewer is then left to assume that Neighbor B will (or should) drop everything and run to the nearest car dealer to buy the same exact car.

Commercials are rarely a good gauge of actual behavior (Exhibit A: Green M&Ms), but still, how much are we influenced by the purchases people around us make?

As a proxy for this, Mark Grinblatt from U.C.L.A. and Matti Keloharju and Seppo Ikäheimo from the Helsinki School of Economics investigated the car buying habits of neighbors in two Finnish provinces.

They found that over a 3-year period, there were 35 percent more automobile purchases than would be expected by pure chance. They trace the result to a short-lived influence (lasting roughly 10 days) on other neighbors by the original car buyer. The influence, or increased chance of buying a car, was more pronounced in rural areas, on neighbors closest to the car buyer, on used-car purchases, and on people from the lowest income class. The usual end result of this influence was the purchase of a car with same make and model.

It's important to note that for the vast majority of people this influence won't mean that they're immediately going to go buy a car. The researchers found that the increased chance of a car purchase was usually in the 10 to 20 percent range. So, if you have little or no interest in buying a car then a 10 percent extra chance isn't going to make much of a difference.

While the obvious explanation for the phenomenon -- and one that advertisements hope to capitalize upon -- is that neighbors are moved to make a purchase based on behaviors like envy or snobbery, the researchers speculate otherwise.

The most likely reason, they say, is that neighbors are passing along price and quality information:

Learning that a particular make of car accelerates very nicely, that the seats are comfortable, or that research done by the neighbor suggests it gets great fuel mileage or doesn't tend to require frequent repairs, is more likely to be useful to a prospective consumer. Similarly, it is more useful to learn that a particular dealer who specializes in Volvo wagons is likely to give favorable financing terms because of his current inventory situation. Such information may not be as readily available from public sources.

Advertising, reviews, and warrantees all serve to mitigate the asymmetric information problem in new car purchases...They operate to a lesser degree in the used car market if at all. Hence, the information story would also predict that neighbor influence might be stronger for used car purchases. This is a category of good where quality concerns or pricing ambiguity may be particularly important.

The information story also is consistent with the demographic pattern of neighbor influence. Consumers in the lower income deciles are more prone to purchase used cars. Lower income consumers and those in rural area also may find it relatively more difficult to access sources of information that substitute for neighbor "word-of-mouth."

Also lending credence to the information explanation, another recent study showed that when BMWs were given away for free in a Dutch lottery, the winners' neighbors were no more likely to buy that car.

One lesson for makers of goods intended for conspicuous consumption? Giving away your product might increase the public's awareness, but it probably won't help your bottom line.