Pricing of goods with bandwagon properties: The curse of coordination

Abstract

Social interactions play an important role on the collective outcomes. The decision of leaving a neighborhood, to attend a seminar or a crowded bar, to participate to collective actions such as strikes and riots, are particular examples. In market situations like the subscription to a telephone network or the choice of a computer operating system, the willingness to pay generally depends not only on the individual preferences but also on the choice made by others. Long after the pioneering works of T. C. Schelling [6] and of M. Granovetter [5], there has been a growing economic literature that recognizes the influence of social interactions on consumers. When the utility of a good increases with the number of buyers, there generically exist multiple equilibria for some range of prices. The Pareto-optimal equilibrium corresponds to the high demand solution, but this equilibrium may be not achieved due to a lack of coordination. In contrast, the analysis of the supply has deserved much less attention. A particular insightful paper is Becker’s note [1] attributing to social interactions the fact that popular restaurants do not increase their prices despite a persistent excess demand. In this paper we present a recent work where we go one step further, addressing the pricing issue in a monopoly market for goods with bandwagon effects in its generality.