network externalities - when person’s demand depends on someone else’s demands
- positive network externality - to be in style, be like everyone else (bandwagon effect)
- marketing to make good popular (not banking on low costs, good quality)
- makes consumer willing to spend more on good only because others do
- relatively more elastic than neutral network externality
- general urge to match up to standards of everyone else
- consistency - quantity consumed by individual must be on demand curve associated w/ other consumers’ demands
- forms aggregate demand curve (points of consistency where individual demand matches demand of others)
- assume that others will behave like you >> personal choices can affect others to make choices that come full-circle
bandwagon effect - more often for children's toys
- more items initially bought if consumers think a large number of other consumers already have it
- more people buy product >> larger bandwagon effect
- more people own a product >> higher intrinsic value
- firms will produce more goods/services for that particular product
- ex. ipod
- makes market demand more elastic
- individual demand function will have some component proportional to overall market demand
- yindividual = C + kymarket
If the individual demand function is y = 2 - P/30 - Y/30, where P is the price and Y is the market demand, then find the market demand for 30 consumers.
- Y = 30y in this case
- need to solve for y in terms of P first, and then find Y
- y = 2 - P/30 - Y/30 = 2 - P/30 - (30y)/30 = 2 - P/30 - y
- 2y = 2 - P/30
- y = 1 - P/60
- Y = 30y = 30(1 - P/60)
- Y = 30 - P/2
snob effect - negative network externality, desire to own exclusive goods
- more people own a product >> no longer unique
- less items initially bought if consumers think a large number of other consumers already have it
- makes market demand less elastic
- individual demand function will also have some component proportional to negative overall market demand
- yindividual = C - kymarket
Subject:
Subject X2:
