Entanglement between Demand and Supply in Markets with Bandwagon Goods

Mirta B. Gordon (Laboratoire d’Informatique de Grenoble), Jean-Pierre Nadal (Ecole des Hautes Etudes en Sciences Sociales,Universite Paris Diderot), Denis Phan (Universite Paris Sorbonne-Paris IV), and Viktoriya Semeshenko (Laboratoire d’Informatique de Grenoble, de Buenos Aires) analyze Entanglement between Demand and Supply in Markets with Bandwagon Goods

ABSTRACT: Whenever customers’ choices (e.g. to buy or not a given good) depend on others choices (cases coined ‘positive externalities’ or ‘bandwagon effect’ in the economic literature), the demand may be multiply valued: for a same posted price, there is either a small number of buyers, or a large one — in which case one says that the customers {it coordinate}. This leads to a dilemma for the seller: should he sell at a high price, targeting a small number of buyers, or at low price targeting a large number of buyers? In this paper we show that the interaction between demand and supply is even more complex than expected, leading to what we call the {it curse of coordination}: the pricing strategy for the seller which aimed at maximizing his profit corresponds to posting a price which, not only assumes that the customers will coordinate, but also lies very near the critical price value at which such high demand no more exists. ! This is obtained by the detailed mathematical analysis of a particular model formally related to the Random Field Ising Model and to a model introduced in social sciences by T C Schelling in the 70’s.