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Conformity based behavior and the dynamics of price competition: a new rational for fashion shifts

Author

Listed:
  • Filomena Garcia

    () (ISEG - Technical University of Lisbon and UECE)

  • Joana Resende

    () (CEF.UP and Faculdade de Economia, Universidade do Porto and CORE, Université catholique de Louvain)

Abstract

This paper deals with dynamic price competition in markets in which the perception of consumers regarding the value of goods depends on the choices of other consumers in the market. In particular, we consider the case in which consumers tend to imitate their peers, generating a conformity effect. In the context of a finite horizon model, we show that conformity based behavior creates new channels of dynamic interaction between firms, changing the nature of price competition. As time evolves, both price strategic complementarity and substitutability may arise along the equilibrium trajectory. This leads to V-shaped equilibrium price paths and oscillating trajectories of market shares. We provide also a new rational for the inversion of fashion trends.

Suggested Citation

  • Filomena Garcia & Joana Resende, 2009. "Conformity based behavior and the dynamics of price competition: a new rational for fashion shifts," FEP Working Papers 339, Universidade do Porto, Faculdade de Economia do Porto.
  • Handle: RePEc:por:fepwps:339
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    More about this item

    Keywords

    dynamic price competition; consumer behavior; conformity; fashion shift;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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