|Working Paper #16-95|
|Product Differentiation in the Presence of Snob and Bandwagon Effects|
|Ami Navon, Oz Shy and Jacques-Francois Thisse|
Using two standard location models, we investigate price competition and divergence from optimal product differentiation when consumer preferences are influenced by the number of consumers shopping at the same store. Snob effects tend to lessen competition and increase prices while bandwagon effects make competition fiercer and lead to lower prices. Furthermore, in the duopoly case, an increase in the total population may hurt the clients of a store despite the fact that they benefit from price cuts. Finally, under free entry increasing the population may lead to a decrease in the equilibrium number of stores and always enlarges the divergence between the equilibrium and optimal numbers of stores.
|Jel Nos.: L1. R3.|
|Keywords: Snobbism. Conformity. Product Differentiation. Location.|