Social interactions, product differentiation and discontinuity of demand

• Published in: Journal of mathematical economics Vol. 47; no. 4-5; pp. 642 - 653
• Main Authors: Pigeard de Almeida Prado, Fernando, Belitsky, Vladimir, Ferreira, Alex Luiz
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.08.2011; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Mathematical Economics
• Subjects: Consumer behavior; Consumer preferences; Consumption theory; Decision making; Demand; Demand theory; Discontinuity of demand; Economic models; Heterogeneity; Market analysis; Multiple market equilibria; Preferences; Product differentiation; Social interaction; Social interactions; Social interactions Heterogeneity Product differentiation Multiple market equilibria Discontinuity of demand; Studies; Heterogeneity; Discontinuity of demand; Social interactions; Multiple market equilibria; Product differentiation
• ISSN: 0304-4068; 1873-1538
• DOI: 10.1016/j.jmateco.2011.09.003

We propose a discrete choice model of socially interacting consumers choosing between two product variants. The model shows that the discontinuity of demand as well as the demand polarization proposed by Becker (1991), A Note on Restaurant Pricing and Other Examples of Social Influences on Price, depend crucially on the heterogeneity of consumers’ preferences and on the level of product differentiation. When the two products are sufficiently similar, it turns out that the market is shared asymmetrically as suggested by Becker (1991). By contrast, when the products are different and the preferences of the consumers are sufficiently heterogeneous, the market is shared symmetrically as in Hotelling’s (1929) model.