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Price competition when consumer behavior is characterized by conformity or vanity

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  • GRILO, Isabel

    (GREMARS, Univeristé de Lille III and Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • SHY, Oz

    (Department of Economics, Stockholm School of Economics, Stockholm, Sweden)

  • THISSE, Jacques-François

    ()
    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

Abstract

It has long been recognized that the pleasure of consuming a good may be affected by the consumption choice of other consumers. At least two types of motivations may explain such a behavior. In some cases social pressures may lead to conformity; while in some other cases individuals may feel the need of exclusiveness under the form of vanity. Such externalities have proven to be important in several markets where the decision to buy a product is positively or negatively affected by the number of consumers purchasing the same product. However, the market and welfare implication of these effects are still unclear. To investigate them, we propose to graft the consumption externality model onto the spatial duopoly model. When conformity is present but not too strong, both firms remain in business but price com- petition is fiercer and results in lower prices. The market share of the large firm increases with the population size; as the population keeps rising, the large firm serves the entire market and sets a price which has the nature of a limit price. When conformity is strong enough, different equilibria may exist. These equilibria are such that only one firm has a positive market share or both firms split the market. At the other extreme, when vanity is at work, price competition is relaxed.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1997032.

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Date of creation: 01 Apr 1997
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Handle: RePEc:cor:louvco:1997032

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Related research

Keywords: Price competition; network; consumption externality;

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References

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  1. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
  2. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  3. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-73, June.
  4. Corneo, Giacomo & Jeanne, Olivier, 1997. "Conspicuous consumption, snobbism and conformism," Journal of Public Economics, Elsevier, vol. 66(1), pages 55-71, October.
  5. Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1109-16, October.
  6. Cole, Harold L & Mailath, George J & Postlewaite, Andrew, 1992. "Social Norms, Savings Behavior, and Growth," Journal of Political Economy, University of Chicago Press, vol. 100(6), pages 1092-1125, December.
  7. Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-131, Spring.
  8. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 841-77, October.
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