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Demand with Consumption Externalities

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  • Finn Christensen

    ()
    (Department of Economics, Towson University)

Abstract

This paper studies stability and slope properties of market demand when disaggregated consumption externalities exist. Equilibrium is stable when feedback effects are limited, where feedback effects exist when own demand is indirectly affected by own consumption. Market demand is downward sloping if consumption externalities are not too strong and negative consumption externalities are not too varied. Under purely positive consumption externalities market demand is downward sloping in any stable equilibrium. Demand may be stable and upward sloping when negative consumption externalities exist. Under purely negative consumption externalities, upward sloping demand requires at least one "spoiler" whose consumption has a cumulatively large negative effect on others' demand.

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File URL: http://www.towson.edu/cbe/economics/workingpapers/2014-02.pdf
File Function: First version, 2014
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Bibliographic Info

Paper provided by Towson University, Department of Economics in its series Working Papers with number 2014-02.

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Length: 32 pages
Date of creation: Apr 2014
Date of revision: Apr 2014
Handle: RePEc:tow:wpaper:2014-02

Contact details of provider:
Postal: Towson, Maryland 21252-0001
Phone: 410-704-2959
Fax: 410-704-3424
Web page: http://www.towson.edu/cbe/economics/
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Related research

Keywords: Demand; consumption externalities; bandwagon and snob effects; network effects; strategic complements and substitutes; interdependent preferences; congestion; feedback effects; stability; slope of market demand; moderate social influence.;

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References

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  1. Jeffrey Rohlfs, 1974. "A Theory of Interdependent Demand for a Communications Service," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 16-37, Spring.
  2. Deb, Rahul, 2009. "A testable model of consumption with externalities," Journal of Economic Theory, Elsevier, vol. 144(4), pages 1804-1816, July.
  3. Ed Hopkins & Tatiana Kornienko, 2004. "Running to Keep in the Same Place: Consumer Choice as a Game of Status," American Economic Review, American Economic Association, vol. 94(4), pages 1085-1107, September.
  4. Karp, Larry & Lee, In Ho & Mason, Robin, 2003. "A global game with strategic substitutes and complements," CUDARE Working Paper Series 940, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  5. Andrew Postlewaite, . ""The Social Basis of Interdependent Preferences''," CARESS Working Papres 97-14, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  6. Guoqiang Tian & Liyan Yang, 2009. "Theory of negative consumption externalities with applications to the economics of happiness," Economic Theory, Springer, vol. 39(3), pages 399-424, June.
  7. Charles R. Plott & Jared Smith, 1999. "Instability of Equilibria in Experimental Markets: Upward-Sloping Demands, Externalities, and Fad-Like Incentives," Southern Economic Journal, Southern Economic Association, vol. 65(3), pages 405-426, January.
  8. Gary S. Becker & Kevin M. Murphy & Ivan Werning, 2005. "The Equilibrium Distribution of Income and the Market for Status," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 282-310, April.
  9. Micha Gisser & James E. McClure & Giray Okten & Gary Santoni, 2009. "Some Anomalies Arising from Bandwagons that Impart Upward Sloping Segments to Market Demand," Econ Journal Watch, Econ Journal Watch, vol. 6(1), pages 21-34, January.
  10. Yann Bramoull? & Rachel Kranton & Martin D'Amours, 2014. "Strategic Interaction and Networks," American Economic Review, American Economic Association, vol. 104(3), pages 898-930, March.
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