Entanglement between Demand and Supply in Markets with Bandwagon Goods
Whenever customers' choices (e.g. to buy or not a given good) depend on others choices (cases coined 'positive externalities' or 'bandwagon effect' in the economic literature), the demand may be multiply valued: for a same posted price, there is either a small number of buyers, or a large one -- in which case one says that the customers coordinate. This leads to a dilemma for the seller: should he sell at a high price, targeting a small number of buyers, or at low price targeting a large number of buyers? In this paper we show that the interaction between demand and supply is even more complex than expected, leading to what we call the curse of coordination: the pricing strategy for the seller which aimed at maximizing his profit corresponds to posting a price which, not only assumes that the customers will coordinate, but also lies very near the critical price value at which such high demand no more exists. This is obtained by the detailed mathematical analysis of a particular model formally related to the Random Field Ising Model and to a model introduced in social sciences by T C Schelling in the 70's.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mirta B. Gordon & Jean-Pierre Nadal & Denis Phan & Viktoriya Semeshenko, 2007.
"Discrete Choices under Social Influence: Generic Properties,"
- Denis Phan, 2006. "Discrete Choices under Social Influence:Generic Properties," Post-Print halshs-00105857, HAL.
- Soetevent, Adriaan R. & Kooreman, Peter, 2004.
"A discrete choice model with social interactions; with an application to high school teen behavior,"
CCSO Working Papers
200401, University of Groningen, CCSO Centre for Economic Research.
- Peter Kooreman & Adriaan R. Soetevent, 2007. "A discrete-choice model with social interactions: with an application to high school teen behavior," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 599-624.
- Kooreman, P. & Soetevent, A., 2007. "A discrete choice model with social interactions; with an application to high school teen behavior," Other publications TiSEM 39fff234-271a-4058-9912-7, Tilburg University, School of Economics and Management.
- Yannis M. Ioannides & Jeffrey E. Zabel, 2003.
"Neighbourhood effects and housing demand,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 18(5), pages 563-584.
- Yannis M. Ioannides & Jeffrey E. Zabel, 2000. "Neighborhood Effects and Housing Demand," Discussion Papers Series, Department of Economics, Tufts University 0012, Department of Economics, Tufts University.
- Mirta Gordon & Jean-Pierre Nadal & Denis Phan & Jean Vannimenus, 2005.
"Sellers dilemna due to social interactions between customers,"
- Gordon, Mirta B. & Nadal, Jean-Pierre & Phan, Denis & Vannimenus, Jean, 2005. "Seller's dilemma due to social interactions between customers," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 356(2), pages 628-640.
- Durlauf, S.N., 1992.
"A Theory of Persistent Income Inequality,"
47, Stanford - Institute for Thoretical Economics.
- Charles F. Manski, 2000.
"Economic Analysis of Social Interactions,"
NBER Working Papers
7580, National Bureau of Economic Research, Inc.
- Brian Krauth, 2004.
"Simulation-based estimation of peer effects,"
- Jean-Pierre Nadal & Denis Phan & Mirta Gordon & Jean Vannimenus, 2005.
"Multiple equilibria in a monopoly market with heterogeneous agents and externalities,"
Taylor & Francis Journals, vol. 5(6), pages 557-568.
- Denis Phan & Mirta Gordon & J.-P. Nadal & J. Vannimenus, 2005. "Multiple equilibria in a monopoly market with heterogeneous agents and externalities," Post-Print halshs-00078792, HAL.
- Edward L. Glaeser & Bruce Sacerdote & Jose A. Scheinkman, 1995.
"Crime and Social Interactions,"
NBER Working Papers
5026, National Bureau of Economic Research, Inc.
- Edward E. Glaeser & Bruce Sacerdote & Jose A. Scheinkman, 1995. "Crime and Social Interactions," Harvard Institute of Economic Research Working Papers 1738, Harvard - Institute of Economic Research.
- Giorgio Topa, 2001.
"Social Interactions, Local Spillovers and Unemployment,"
Review of Economic Studies,
Oxford University Press, vol. 68(2), pages 261-295.
- Topa, Giorgio, 1997. "Social Interactions, Local Spillovers and Unemployment," Working Papers 97-17, C.V. Starr Center for Applied Economics, New York University.
- Brian Krauth, 2006. "Social interactions in small groups," Canadian Journal of Economics, Canadian Economics Association, vol. 39(2), pages 414-433, May.
- Cabral, Luis M. B. & Salant, David J. & Woroch, Glenn A., 1999.
"Monopoly pricing with network externalities,"
International Journal of Industrial Organization,
Elsevier, vol. 17(2), pages 199-214, February.
- Brock,W.A. & Durlauf,S.N., 2000.
"Discrete choice with social interactions,"
7, Wisconsin Madison - Social Systems.
- Q. Michard & J.-P. Bouchaud, 2005. "Theory of collective opinion shifts: from smooth trends to abrupt swings," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 47(1), pages 151-159, 09.
- Christian Borghesi & Jean-Philippe Bouchaud, 2007. "Of songs and men: a model for multiple choice with herding," Quality & Quantity: International Journal of Methodology, Springer, vol. 41(4), pages 557-568, August.
- H. Leibenstein, 1950. "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand," The Quarterly Journal of Economics, Oxford University Press, vol. 64(2), pages 183-207.
- Quentin Michard & Jean-Philippe Bouchaud, 2005. "Theory of collective opinion shifts: from smooth trends to abrupt swings," Science & Finance (CFM) working paper archive 500060, Science & Finance, Capital Fund Management.
- Bensaid, Bernard & Lesne, Jean-Philippe, 1996. "Dynamic monopoly pricing with network externalities," International Journal of Industrial Organization, Elsevier, vol. 14(6), pages 837-855, October.
- Semeshenko, Viktoriya & Gordon, Mirta B. & Nadal, Jean-Pierre, 2008. "Collective states in social systems with interacting learning agents," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(19), pages 4903-4916.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1209.1321. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.