Journal of Dynamics and Games (JDG)

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

Pages: 153 - 167, Volume 3, Issue 2, April 2016      doi:10.3934/jdg.2016008

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Filomena Garcia - Department of Economics of Indiana University, 100 S Woodlawn Ave, Bloomington, IN 47405, United States (email)
Joana Resende - Faculdade de Economia do Porto, Rua Dr. Roberto Frias, 4200-464 Porto, Portugal (email)

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.

Keywords:  Dynamic price competition, consumer behavior, conformity, fashion shift.
Mathematics Subject Classification:  Primary: D41, L13.

Received: December 2015;      Revised: April 2016;      Available Online: April 2016.