Each society is characterized by its collection of social norms, or simply a culture. The fact that consumers live in societies imply that their actions in general, and consumption choice in particular, are affected by what social norms dictate. Ever since Veblen (1899), it is a well-documented fact that consumer choices are not only based upon their own preferences and income; they are also affected by the consumption choices of others. Such influences have proven to be important in many markets where the decision to buy from a particular vendor is positively or negatively affected by the number of consumers purchasing the same brand or patronizing the same store. The corresponding effects are known as bandwagon, congestion, or snob/conformity effects (Leibenstein, 1950). The microeconomic foundations of such effects as well as the market and welfare implications of this type of consumer behavior are explored in this chapter.

Section 10.1 starts out with basic definitions of conformity and statusseeking. This section utilizes elementary calculus so it can be easily skipped by those who do not know any calculus. Section 10.2 introduces price competition among firms producing products or services and compares the market outcomes when consumer preferences exhibit conformity to the case when preferences exhibit vanity. Section 10.3 demon strates the consequences of network effects in entertainment places. Section 10.4 demonstrates the inefficiency of the practice of gift-giving.

Status-Seeking vs. Conformism: A Calculus Approach

Social decisions are those decisions that depend on others’ decisions and also influence decisions of others. There is a significant difference between social decisions and conventional economic decision-making.