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Endogenous Demand and Demanding Consumers: A Computational Approach

Abstract

In this paper we introduce an agent-based model of a discretionary consumption sector in which demand is transformed by social emulation among consumers, thereby making producers adapt to demand. Our theoretical approach considers bounded rationality of agents (consumers and producers), heterogeneity of both agents and product characteristics, and the co-evolution of consumer desires, mainly, by social emulation. The proposed dynamics can reproduce some stylized facts that are well known in literature, such as the S-shaped adoption rate curve that many industries develop over their life cycle. Our model also obtains a novel result with relevant theoretical implications: the strictness of requirements, a factor rarely studied in consumer theory, has an important effect on some aggregate variables that are usually explained by the supply side, such as the number of producers or the industrial concentration index. In particular, the minimum number of producers (and then, the maximum Herfindahl index) is obtained for an intermediate degree of consumer requirements, a fact that is empirically validated for the wine market in Spain.

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Notes

  1. 1.

    Those which are not strictly necessary for life.

  2. 2.

    This parameter can measure two types of market opacity: on the demand side, the uncertainty about the exact desires of any niche; on the supply side, the impossibility of satisfying the desires (e.g. patents) or not knowing how to do it for technical reasons.

  3. 3.

    Notice that some of the parameters of the demand side, such as r and \(\updelta \), could be modified by a producer by means of commercial marketing effort, whereas the parameter \(\upalpha \), representing the fragmentation of demand, could be altered by means of social marketing. On the supply side, the capacity of innovation \(\uplambda \) could be changed by I+D effort, the probability of exit q could depend on the financial situation of the economy, and the market opacity \(\upsigma \) could be reduced by making a deeper market study.

  4. 4.

    These values generate typical time evolutions of the system, and result in similar properties for the three aggregate variables over a wide range of parameter values.

  5. 5.

    We consider each variety to be a producer.

  6. 6.

    The number of intervals considered for discretizing the price variable is taken from two of the most usual statistical criteria: \(\hbox {log}_2(n)=8.6438\) or \(\root 3 \of {n}=7.3680\), where \(n=400\) is the sample size.

  7. 7.

    The results obtained are robust with respect to the number of intervals and the threshold of representativeness considered.

  8. 8.

    The only difference between empirical data and the theoretic behavior takes place in the first interval of prices that should generate a behavior (with respect to the number of producers and the Herfindahl index) that is similar to the second one of the lowest prices. This could be because consumers that are not very demanding do not purchase wine at medium and large retailers (for example, they purchase at cask-wine markets) and hence, they are not correctly represented in data of Nielsen.

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Acknowledgments

The authors thank Nielsen Company for providing us data from their retail measurement services, and in particular we wish to thank Elena Alonso for her kind personal treatment. The authors also thank the support of Centro de Computación Científica at UAM where simulations were carried out.

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Correspondence to Carlos M. Fernández-Márquez.

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Fernández-Márquez, C.M., Fatás-Villafranca, F. & Vázquez, F.J. Endogenous Demand and Demanding Consumers: A Computational Approach. Comput Econ 49, 307–323 (2017). https://doi.org/10.1007/s10614-015-9557-9

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Keywords

  • Agent-based model
  • Emulation
  • Demand-driven market
  • Consumer desires
  • Producer decisions
  • Supply and demand
  • Evolutionary market