Abstract
This paper explores the consequences of interdependent preferences for consumer goods, that is, preferences that evolve in response to the consumption decisions of neighboring agents. The key feature is that the interdependence of preferences coexists and interacts with the price mechanism in a general equilibrium environment. The interaction between the negative feedback operating through the price system and the positive feedback expressed in the bandwagon effect creates distinct geographic patterns of consumption on the micro-level and a characteristic evolution of average preferences and production on the macro-level. In equilibrium, agents’ preferences and consumption are completely polarized into stable regions in which every agent consumes the same good exclusively.
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