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

Filomena Garcia and Joana Resende

FEP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

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.

Keywords: dynamic price competition; consumer behavior; conformity; fashion shift (search for similar items in EconPapers)
JEL-codes: C61 D11 L13 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2009-10
New Economics Papers: this item is included in nep-com, nep-mic and nep-mkt
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Persistent link: https://EconPapers.repec.org/RePEc:por:fepwps:339

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