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

Abstract

This paper deals with dynamic price competition in markets in which theperception of consumers regarding the value of goods depends on the choices ofother consumers in the market. In particular, we consider the case in whichconsumers exhibit conformist preferences, which leads them to imitate their peers. In the context of a finite horizon model, we show that conformity-basedbehavior 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 newrationale for the inversion of fashion trends.

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