Snobs, bandwagons, and the origin of social customs in consumer behavior

Abstract

We show how social norms may be endogenized in the context of Akerlof's theory of social custom. We argue that social norms may be consciously created by agents through an investment process. This idea is illustrated in a formal model of consumption norms. Socially inefficient consumption norms, giving rise to bandwagon and snob effects, are generated by producers that maximize their intertemporal profit. We characterize the equilibrium path of consumption norms and show that norms may be created only if producers have enough market power.