Network Effects

So far we’ve assumed each consumer’s demand is independent — your demand for pizza doesn’t depend on how much pizza your neighbour eats. But in many markets, what other people buy changes what you want to buy. Economists call this a network effect. Sometimes other people buying makes you want one too (the bandwagon effect — joining the crowd). Sometimes it makes you want one less (the snob effect — staying off the bandwagon). Both flavours violate the independence assumption that horizontal summation relies on.

The bandwagon effect occurs when a consumer values a good more as other people buy it. Think of social media platforms (useless if you’re the only user), fashion trends (you want what’s popular), or messaging apps. As more people adopt, each individual’s demand curve shifts right, so the market demand curve is flatter (more elastic) than simple horizontal summation would predict. A price drop triggers a multiplier: more buyers attract even more buyers.

The snob effect works in the opposite direction. Consumers value exclusivity — the fewer people who own the good, the more desirable it becomes. When the price of a Hermès bag drops and more people buy it, the snob consumer’s demand decreases because the good has lost its exclusive appeal. The market demand curve is steeper (less elastic) than it would be from simple summation, because each price drop is partially offset by reduced snob demand.