Salient Peers and Consumption: Evidence from the Warranty Claims of Neighbors

Abstract

We provide novel evidence that peer induced saliency bias acts as a mechanism to explain consumption peer effects. This bias occurs when consumers overweight the influence of a single, salient peer when assessing brand quality, and underweight more objective, aggregate quality data. We exploit data on durable good warranty claims, as an indicator of poor brand quality. We find that a warranty claim from a single neighbor, causes other neighbors to reduce their subsequent purchases of that brand. These peer induced biases are more likely to generate brand switching away from objectively higher quality brands, thus making consumers worse off.