We propose a diffusion model for a new product percolating in a social network. 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 turn out to be most efficient, because clustering leads to redundant information flows hampering effective product diffusion. We further show how the more equal a society, the more efficient the diffusion process.
|Name||Bath Economics Research Working Papers|