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Durable Goods and Conformity

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  • Christopher L. House
  • Emre Ozdenoren

Abstract

Is the variety of products supplied in markets a reflection of the diversity of consumers' preferences? In this paper, we argue that the distribution of durable goods offered in markets tends to be compressed relative to the distribution of consumers' underlying preferences. In particular, there are strong incentives for conformity in markets for durable goods. The reason for conformity is natural: durables (for example houses) are traded and as a result, demand for these goods is influenced by their resale value. Agents may like one product, but purchase another because of resale concerns. We show that (1) there is a tendency to conform to the average preference; (2) conformity depends primarily on the number of people with extreme preferences; (3) conformity increases with increases in durability, patience, and the likelihood of trade; and (4) equilibrium conformity is not necessarily optimal. Surprisingly, there tends to be too little conformity in equilibrium. Conformity also creates a demand for rental markets. Renting does not necessarily decrease conformity however. Instead, renting tends to exaggerate conformity in the owner-occupied market.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12028.

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Date of creation: Feb 2006
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Publication status: published as House, Christopher L. and Emre Ozdenoren. “Durable Goods and Conformity.” RAND Journal of Economics 39, 2 (Summer 2008): 452-468.
Handle: RePEc:nbr:nberwo:12028

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  1. Alessandro Lizzeri & Igal Hendel, 1999. "Adverse Selection in Durable Goods Markets," American Economic Review, American Economic Association, American Economic Association, vol. 89(5), pages 1097-1115, December.
  2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  4. Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1995. "Social Norms and Random Matching Games," Games and Economic Behavior, Elsevier, Elsevier, vol. 9(1), pages 79-109, April.
  5. Christopher L. House & John V. Leahy, 2004. "An sS Model with Adverse Selection," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(3), pages 581-614, June.
  6. Michi Kandori, 2010. "Social Norms and Community Enforcement," Levine's Working Paper Archive 630, David K. Levine.
  7. Bernheim, B Douglas, 1994. "A Theory of Conformity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(5), pages 841-77, October.
  8. Spence, Michael, 1976. "Product Selection, Fixed Costs, and Monopolistic Competition," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 43(2), pages 217-35, June.
  9. Igal Hendel & Alessandro Lizzeri, 1998. "The Role of Leasing under Adverse Selection," NBER Working Papers 6577, National Bureau of Economic Research, Inc.
  10. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, American Economic Association, vol. 83(1), pages 63-77, March.
  11. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
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Cited by:
  1. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2009. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," American Economic Review, American Economic Association, American Economic Association, vol. 99(5), pages 1878-98, December.
  2. Christopher L. House, 2008. "Fixed Costs and Long-Lived Investments," NBER Working Papers 14402, National Bureau of Economic Research, Inc.
  3. Christopher House, 2008. "Fixed Costs and Long-Lived Investments," 2008 Meeting Papers 3, Society for Economic Dynamics.
  4. Jonathan Halket & Matteo Pignatti, 2012. "Housing tenure choices with private information," Economics Discussion Papers, University of Essex, Department of Economics 717, University of Essex, Department of Economics.
  5. Gavazza, Alessandro & Lizzeri, Alessandro & Rokestkiy, Nikita, 2012. "A quantitative analysis of the used-car market," MPRA Paper 38414, University Library of Munich, Germany.

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