Effect of conformism on firm selection, product quality and home bias

Abstract

• Conformism affects intrinsic demands for products. • Lower conformism reduces demand for each variety. • Lower conformism forces firms with the lower demand and quality to exit. • Lower conformism raises average quality and diminishes product diversity. • The home consumption bias is amplified with a lower degree of conformism. This paper discusses the effect of conformism on the demand for products that differ in quality and studies its implications for firm selection, entry, average quality, and trade patterns. Demand for each variety is shown to fall when consumers have a lower degree of conformism or when the distribution of conformism becomes more concentrated. This induces firms facing lower demand and of lower quality to exit the market, which raises average quality and diminishes product diversity. In an international trade context, home consumption bias is amplified when there is a lower degree of conformism. Home consumption bias is mitigated by the presence of global conformism, in which individuals tend to conform to people across the world rather than within their own country.