Price competition when consumer behavior is characterized by conformity or vanity

Isabel Grilo, Oz Shy and Jacques Thisse
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Isabel Grilo: GREMARS, Univeristé de Lille III and Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium

No 1997032, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: It has long been recognized that the pleasure of consuming a good may be affected by the consumption choice of other consumers. At least two types of motivations may explain such a behavior. In some cases social pressures may lead to conformity; while in some other cases individuals may feel the need of exclusiveness under the form of vanity. Such externalities have proven to be important in several markets where the decision to buy a product is positively or negatively affected by the number of consumers purchasing the same product. However, the market and welfare implication of these effects are still unclear. To investigate them, we propose to graft the consumption externality model onto the spatial duopoly model. When conformity is present but not too strong, both firms remain in business but price com- petition is fiercer and results in lower prices. The market share of the large firm increases with the population size; as the population keeps rising, the large firm serves the entire market and sets a price which has the nature of a limit price. When conformity is strong enough, different equilibria may exist. These equilibria are such that only one firm has a positive market share or both firms split the market. At the other extreme, when vanity is at work, price competition is relaxed.

Keywords: Price competition; network; consumption externality (search for similar items in EconPapers)
JEL-codes: D11 L13 (search for similar items in EconPapers)
Date: 1997-04-01
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Price competition when consumer behavior is characterized by conformity or vanity (2001)
Working Paper: Price competition when consumer behavior is characterized by conformity or vanity (2001)
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