Working Paper: NBER ID: w12028
Authors: Christopher L. House; Emre Ozdenoren
Abstract: Is the variety of products supplied in markets a reflection of the diversity of consumers' preferences? In this paper, we argue that the distribution of durable goods offered in markets tends to be compressed relative to the distribution of consumers' underlying preferences. In particular, there are strong incentives for conformity in markets for durable goods. The reason for conformity is natural: durables (for example houses) are traded and as a result, demand for these goods is influenced by their resale value. Agents may like one product, but purchase another because of resale concerns. We show that (1) there is a tendency to conform to the average preference; (2) conformity depends primarily on the number of people with extreme preferences; (3) conformity increases with increases in durability, patience, and the likelihood of trade; and (4) equilibrium conformity is not necessarily optimal. Surprisingly, there tends to be too little conformity in equilibrium. Conformity also creates a demand for rental markets. Renting does not necessarily decrease conformity however. Instead, renting tends to exaggerate conformity in the owner-occupied market.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| resale concerns (L42) | conformity in purchasing decisions (D10) |
| number of individuals with extreme preferences (D11) | conformity (D70) |
| durability (L15) | conformity (D70) |
| likelihood of trade (F19) | conformity (D70) |
| conformity (D70) | market inefficiency (G14) |