Conformity-based behavior and the dynamics of price competition: A new rationale for fashion shifts

Filomena  Garcia; Joana  Resende

doi:10.3934/jdg.2016008

Article Contents

2016, Volume 3, Issue 2: 153-167. Doi: 10.3934/jdg.2016008

This issue Previous Article The profit-sharing rule that maximizes sustainability of cartel agreements Next Article Asymmetric information in a bilateral monopoly

Conformity-based behavior and the dynamics of price competition: A new rationale for fashion shifts

Filomena Garcia^1, and
Joana Resende^2,

1.
Department of Economics of Indiana University, 100 S Woodlawn Ave, Bloomington, IN 47405
2.
Faculdade de Economia do Porto, Rua Dr. Roberto Frias, 4200-464 Porto

Received: December 2015

Revised: April 2016

Published: April 2016

Abstract / Introduction Related Papers Cited by

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 exhibit conformist preferences, which leads them to imitate their peers. 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. We focus on the case of high network effects for which we obtain V-shaped equilibrium price paths and oscillating trajectories of market shares. We provide also a new rationale for the inversion of fashion trends.

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Mathematics Subject Classification: Primary: D41, L13.

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