Bandwagon Effect - Use in Microeconomics

Use in Microeconomics

In microeconomics, bandwagon effect describes interactions of demand and preference. The bandwagon effect arises when people's preference for a commodity increases as the number of people buying it increases. This interaction potentially disturbs the normal results of the theory of supply and demand, which assumes that consumers make buying decisions solely based on price and their own personal preference. Gary Becker has even argued that the bandwagon effect could be so strong as to make the demand curve slope upward. This belies the fact that there is no empirical evidence for a bandwagon demand relationship with a positive coefficient. Others argue further that a positive coefficient is inconsistent with demand parameterizations and generates comparative static implications that are untenable.

A further explanation of the bandwagon effect in new products adoption (marketing) could lay in the "relative" performance of the adopters, versus the people remaining with the established solution. If the innovation creates a value added capable to shift the ranking of the adopter within a group of Customers, when the adopter improves his own ranking, he will worsen everyone else's ranking. This creates for the remainings an incentive to switch to the innovation. ( this concept is adapted from "the Art of strategy - Dixit, Nalebuff - pg 271,§2 )