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