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 & 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.  doi: 10.1006/game.1996.0061.  Google Scholar

[2]

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

[3]

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

[4]

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

[5]

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

[6]

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

[7]

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

[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.   Google Scholar

[9]

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

[10]

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

[11]

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

[12]

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

[13]

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

[14]

T. Doganoglu, Dynamic competition with consumption externalities,, Netnomics, 5 (2003), 116.   Google Scholar

[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.   Google Scholar

[16]

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

[17]

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

[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.  doi: 10.1016/S0047-2727(00)00115-8.  Google Scholar

[19]

S. R. G. Jones, The Economics of Conformism,, Basil Blackwell, (1984).   Google Scholar

[20]

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

[21]

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

[22]

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

[23]

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

[24]

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

[25]

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

[26]

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

[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.  doi: 10.1016/j.ijindorg.2008.10.006.  Google Scholar

[28]

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

[29]

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

[30]

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

[31]

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

[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.  doi: 10.1037/0003-066X.31.2.148.  Google Scholar

[33]

R. Rumbold, The it-bag parade,, Daily Telegraph, (2007).   Google Scholar

[34]

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

[35]

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

[36]

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

[37]

T. Veblen, The Theory of the Leisure Class. An Economic Study of Institutions,, George Allen Unwin, (1922).   Google Scholar

[38]

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

show all references

References:
[1]

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

[2]

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

[3]

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

[4]

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

[5]

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

[6]

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

[7]

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

[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.   Google Scholar

[9]

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

[10]

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

[11]

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

[12]

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

[13]

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

[14]

T. Doganoglu, Dynamic competition with consumption externalities,, Netnomics, 5 (2003), 116.   Google Scholar

[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.   Google Scholar

[16]

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

[17]

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

[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.  doi: 10.1016/S0047-2727(00)00115-8.  Google Scholar

[19]

S. R. G. Jones, The Economics of Conformism,, Basil Blackwell, (1984).   Google Scholar

[20]

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

[21]

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

[22]

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

[23]

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

[24]

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

[25]

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

[26]

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

[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.  doi: 10.1016/j.ijindorg.2008.10.006.  Google Scholar

[28]

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

[29]

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

[30]

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

[31]

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

[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.  doi: 10.1037/0003-066X.31.2.148.  Google Scholar

[33]

R. Rumbold, The it-bag parade,, Daily Telegraph, (2007).   Google Scholar

[34]

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

[35]

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

[36]

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

[37]

T. Veblen, The Theory of the Leisure Class. An Economic Study of Institutions,, George Allen Unwin, (1922).   Google Scholar

[38]

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

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