April  2016, 3(2): 153-167. doi: 10.3934/jdg.2016008

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

1. 

Department of Economics of Indiana University, 100 S Woodlawn Ave, Bloomington, IN 47405, United States

2. 

Faculdade de Economia do Porto, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal

Received  December 2015 Revised  April 2016 Published  April 2016

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.
Citation: Filomena Garcia, Joana Resende. Conformity-based behavior and the dynamics of price competition: A new rationale for fashion shifts. Journal of Dynamics and Games, 2016, 3 (2) : 153-167. doi: 10.3934/jdg.2016008
References:
[1]

R. Amir, Continuous stochastic games of capital accumulation with convex transitions, Games and Economic Behavior, 15 (1996), 111-131. doi: 10.1006/game.1996.0061.

[2]

R. Amir, F. Garcia and J. Resende, Dynamic monopoly pricing under discounted network effects, mimeo, 2016.

[3]

R. Amir and Natalia Lazzati, Network effects, market structure and industry performance, Journal of Economic Theory, 146 (2011), 2389-2419. doi: 10.1016/j.jet.2011.10.006.

[4]

W. Amaldoss and S. Jain, Conspicuous Consumption and sophisticated thinking, Management Science, 51 (2005), 1449-1466. doi: 10.1287/mnsc.1050.0399.

[5]

L. S. Bagwell and B. D. Bernheim, Veblen effects in a theory of conspicuous consumption, The American Economic Review, 86 (1996), 349-373.

[6]

G. S. Becker, A note on restaurant pricing and other examples of social influences on price, Journal of Political Economy, 99 (1991), 1109-1116. doi: 10.1086/261791.

[7]

B. D. Bernheim, A theory of conformity, The Journal of Political Economy, 102 (1994), 841-877. doi: 10.1086/261957.

[8]

S. Bikhchandani, D. Hirshleifer and I. Welch, A theory of fads, fashion, custom, and cultural change as informational cascades, Journal of Political Economy, 100 (1994), 992-1026.

[9]

L. Cabral, Dynamic price competition with network effects, Review of Economic Studies, 78 (2011), 83-111. doi: 10.1093/restud/rdq007.

[10]

G. Corneo and O. Jeanne, Conspicuous consumption, snobbism and conformism, Journal of Public Economics, 66 (1997), 55-71. doi: 10.1016/S0047-2727(97)00016-9.

[11]

G. Corneo and O. Jeanne, Segmented communication and fashionable behavior, Journal of Economic Behavior & Organization, 39 (1999), 371-385. doi: 10.1016/S0167-2681(99)00046-3.

[12]

R. Cowan, W. Cowan and G. Swann, A model of demand with interactions among consumers, International Journal of Industrial Organization, 15 (1997), 711-732. doi: 10.1016/S0167-7187(97)00008-8.

[13]

C. d'Aspremont, J. J. Gabszewicz and J. Thisse, On hotelling's stability in competition, Econometrica, 47 (1979), 1145-1150. doi: 10.2307/1911955.

[14]

T. Doganoglu, Dynamic competition with consumption externalities, Netnomics, 5 (2003), 116-135.

[15]

U. Doraszelski, J. Chen and J. Harrington, Avoiding market dominance: Product compatibility in markets with network effects, RAND Journal of Economics, 40 (2009), 455-485.

[16]

J. J. Gabszewicz and F. Garcia, Optimal monopoly price paths with expanding networks, Review of Network Economics, 6 (2007), 142-149.

[17]

J. J. Gabszewicz and F. Garcia, A note on expanding networks and monopoly pricing, Economics Letters, 98 (2008), 9-15. doi: 10.1016/j.econlet.2007.03.012.

[18]

I. Grilo, O. Shy and J. Thisse, Price competition when consumer behavior is characterized by conformity or vanity, Journal of Public Economics, 80 (2001), 385-408. doi: 10.1016/S0047-2727(00)00115-8.

[19]

S. R. G. Jones, The Economics of Conformism, Basil Blackwell, New York, 1984.

[20]

E. Karni and D. Schmeidler, Fixed preferences and changing tastes, The American Economic Review, 80 (1990), 262-267.

[21]

M. Katz and C. Shapiro, Network effect, competition, and compatibility, American Economic Review, 75 (1985), 424-440.

[22]

D. Kuksov and K. Wang, A model of the "it" products in fashion, Marketing Science, 32 (2013), 51-69.

[23]

D. Kuksov and Y. Xie, Competition in a status goods market, Journal of Marketing Research, 49 (2012), 609-623. doi: 10.1509/jmr.11.0005.

[24]

D. Laussel, M. Montmarin and N. Van Long, Dynamic duopoly with congestion effects, International Journal of Industrial Organization, 22 (2004), 655-677. doi: 10.1016/j.ijindorg.2004.02.001.

[25]

D. Laussel and J. Resende, Dynamic price competition in aftermarkets with network effects, Journal of Mathematical Economics, 50 (2014), 106-118. doi: 10.1016/j.jmateco.2013.10.002.

[26]

S. Markovich, Snowball: A dynamic oligopoly model with indirect network effects, Journal of Economic Dynamics & Control, 32 (2008), 909-938. doi: 10.1016/j.jedc.2007.04.005.

[27]

S. Markovich and J. Moenius, Winning while losing: competition dynamics in the presence of indirect network effects, International Journal of Industrial Organization, 27 (2009), 346-357. doi: 10.1016/j.ijindorg.2008.10.006.

[28]

P. Milgrom and J. Roberts, Rationalizability, learning, and equilibrium in games with strategic complementarities, Econometrica, 58 (1990), 1255-1277. doi: 10.2307/2938316.

[29]

M. Mitchell and A. Skrzypacz, Network externalities and long-run market shares, Economic Theory, 29 (2006), 621-648. doi: 10.1007/s00199-005-0031-0.

[30]

W. Pesendorfer, Design innovation and fashion cycles, The American Economic Review, 85 (1995), 771-792.

[31]

D. Robinson, The economics of fashion demand, The Quarterly Journal of Economics, 75 (1961), 376-398. doi: 10.2307/1885130.

[32]

L. Ross, G. Bierbrauer and S. Hoffman, The role of attribution processes in conformity and dissent: Revisiting the Asch situation, American Psychologist, 3 (1976), 148-157. doi: 10.1037/0003-066X.31.2.148.

[33]

R. Rumbold, The it-bag parade, Daily Telegraph, (November 25), 2007, http://fashion.telegraph.co.uk/news-features/TMG3363792/ The-it-bag-parade.html.

[34]

D. M. Topkis, Equilibrium points in nonzero-sum n-person submodular games, SIAM Journal of Control and Optimization, 17 (1979), 773-787. doi: 10.1137/0317054.

[35]

X. Vives, Nash equilibrium with strategic complementarities, Journal of Mathematical Economics, 19 (1990), 305-321. doi: 10.1016/0304-4068(90)90005-T.

[36]

X. Vives, Complementarities and games: New developments, Journal of Economic Literature, 43 (2005), 437-479. doi: 10.1257/0022051054661558.

[37]

T. Veblen, The Theory of the Leisure Class. An Economic Study of Institutions, George Allen Unwin, London (1922) (First published, 1899).

[38]

H. Yoganarasimhan, Cloak or flaunt? The fashion dilemma, Marketing Science, 31 (2012), 74-95. doi: 10.1287/mksc.1110.0689.

show all references

References:
[1]

R. Amir, Continuous stochastic games of capital accumulation with convex transitions, Games and Economic Behavior, 15 (1996), 111-131. doi: 10.1006/game.1996.0061.

[2]

R. Amir, F. Garcia and J. Resende, Dynamic monopoly pricing under discounted network effects, mimeo, 2016.

[3]

R. Amir and Natalia Lazzati, Network effects, market structure and industry performance, Journal of Economic Theory, 146 (2011), 2389-2419. doi: 10.1016/j.jet.2011.10.006.

[4]

W. Amaldoss and S. Jain, Conspicuous Consumption and sophisticated thinking, Management Science, 51 (2005), 1449-1466. doi: 10.1287/mnsc.1050.0399.

[5]

L. S. Bagwell and B. D. Bernheim, Veblen effects in a theory of conspicuous consumption, The American Economic Review, 86 (1996), 349-373.

[6]

G. S. Becker, A note on restaurant pricing and other examples of social influences on price, Journal of Political Economy, 99 (1991), 1109-1116. doi: 10.1086/261791.

[7]

B. D. Bernheim, A theory of conformity, The Journal of Political Economy, 102 (1994), 841-877. doi: 10.1086/261957.

[8]

S. Bikhchandani, D. Hirshleifer and I. Welch, A theory of fads, fashion, custom, and cultural change as informational cascades, Journal of Political Economy, 100 (1994), 992-1026.

[9]

L. Cabral, Dynamic price competition with network effects, Review of Economic Studies, 78 (2011), 83-111. doi: 10.1093/restud/rdq007.

[10]

G. Corneo and O. Jeanne, Conspicuous consumption, snobbism and conformism, Journal of Public Economics, 66 (1997), 55-71. doi: 10.1016/S0047-2727(97)00016-9.

[11]

G. Corneo and O. Jeanne, Segmented communication and fashionable behavior, Journal of Economic Behavior & Organization, 39 (1999), 371-385. doi: 10.1016/S0167-2681(99)00046-3.

[12]

R. Cowan, W. Cowan and G. Swann, A model of demand with interactions among consumers, International Journal of Industrial Organization, 15 (1997), 711-732. doi: 10.1016/S0167-7187(97)00008-8.

[13]

C. d'Aspremont, J. J. Gabszewicz and J. Thisse, On hotelling's stability in competition, Econometrica, 47 (1979), 1145-1150. doi: 10.2307/1911955.

[14]

T. Doganoglu, Dynamic competition with consumption externalities, Netnomics, 5 (2003), 116-135.

[15]

U. Doraszelski, J. Chen and J. Harrington, Avoiding market dominance: Product compatibility in markets with network effects, RAND Journal of Economics, 40 (2009), 455-485.

[16]

J. J. Gabszewicz and F. Garcia, Optimal monopoly price paths with expanding networks, Review of Network Economics, 6 (2007), 142-149.

[17]

J. J. Gabszewicz and F. Garcia, A note on expanding networks and monopoly pricing, Economics Letters, 98 (2008), 9-15. doi: 10.1016/j.econlet.2007.03.012.

[18]

I. Grilo, O. Shy and J. Thisse, Price competition when consumer behavior is characterized by conformity or vanity, Journal of Public Economics, 80 (2001), 385-408. doi: 10.1016/S0047-2727(00)00115-8.

[19]

S. R. G. Jones, The Economics of Conformism, Basil Blackwell, New York, 1984.

[20]

E. Karni and D. Schmeidler, Fixed preferences and changing tastes, The American Economic Review, 80 (1990), 262-267.

[21]

M. Katz and C. Shapiro, Network effect, competition, and compatibility, American Economic Review, 75 (1985), 424-440.

[22]

D. Kuksov and K. Wang, A model of the "it" products in fashion, Marketing Science, 32 (2013), 51-69.

[23]

D. Kuksov and Y. Xie, Competition in a status goods market, Journal of Marketing Research, 49 (2012), 609-623. doi: 10.1509/jmr.11.0005.

[24]

D. Laussel, M. Montmarin and N. Van Long, Dynamic duopoly with congestion effects, International Journal of Industrial Organization, 22 (2004), 655-677. doi: 10.1016/j.ijindorg.2004.02.001.

[25]

D. Laussel and J. Resende, Dynamic price competition in aftermarkets with network effects, Journal of Mathematical Economics, 50 (2014), 106-118. doi: 10.1016/j.jmateco.2013.10.002.

[26]

S. Markovich, Snowball: A dynamic oligopoly model with indirect network effects, Journal of Economic Dynamics & Control, 32 (2008), 909-938. doi: 10.1016/j.jedc.2007.04.005.

[27]

S. Markovich and J. Moenius, Winning while losing: competition dynamics in the presence of indirect network effects, International Journal of Industrial Organization, 27 (2009), 346-357. doi: 10.1016/j.ijindorg.2008.10.006.

[28]

P. Milgrom and J. Roberts, Rationalizability, learning, and equilibrium in games with strategic complementarities, Econometrica, 58 (1990), 1255-1277. doi: 10.2307/2938316.

[29]

M. Mitchell and A. Skrzypacz, Network externalities and long-run market shares, Economic Theory, 29 (2006), 621-648. doi: 10.1007/s00199-005-0031-0.

[30]

W. Pesendorfer, Design innovation and fashion cycles, The American Economic Review, 85 (1995), 771-792.

[31]

D. Robinson, The economics of fashion demand, The Quarterly Journal of Economics, 75 (1961), 376-398. doi: 10.2307/1885130.

[32]

L. Ross, G. Bierbrauer and S. Hoffman, The role of attribution processes in conformity and dissent: Revisiting the Asch situation, American Psychologist, 3 (1976), 148-157. doi: 10.1037/0003-066X.31.2.148.

[33]

R. Rumbold, The it-bag parade, Daily Telegraph, (November 25), 2007, http://fashion.telegraph.co.uk/news-features/TMG3363792/ The-it-bag-parade.html.

[34]

D. M. Topkis, Equilibrium points in nonzero-sum n-person submodular games, SIAM Journal of Control and Optimization, 17 (1979), 773-787. doi: 10.1137/0317054.

[35]

X. Vives, Nash equilibrium with strategic complementarities, Journal of Mathematical Economics, 19 (1990), 305-321. doi: 10.1016/0304-4068(90)90005-T.

[36]

X. Vives, Complementarities and games: New developments, Journal of Economic Literature, 43 (2005), 437-479. doi: 10.1257/0022051054661558.

[37]

T. Veblen, The Theory of the Leisure Class. An Economic Study of Institutions, George Allen Unwin, London (1922) (First published, 1899).

[38]

H. Yoganarasimhan, Cloak or flaunt? The fashion dilemma, Marketing Science, 31 (2012), 74-95. doi: 10.1287/mksc.1110.0689.

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