Consumption externalities and preference complementarities

Social interactions can lead to a variety of phenomena including consumption externalities and complementarities. Consumption externalities arise when the choices of others have an effect on the total value of a household's purchases; complementarities arise when the choices of others have an effect on the marginal value of a household's purchases. This paper develops a conceptual model that separately identifies consumption externalities and complementarities and illustrates their significance in an application to a household's choice of grocery store. We propose empirical measures of the value of consumption externalities and complementarities based on the benefit function and show how the two effects can be identified separately using household level data. Preliminary results show that purchases at traditional grocery stores have both positive externalities on other shoppers and complementarities with others' purchases whereas purchases at superstores have negative externalities on other shoppers and show no complementarity with others' purchases, even if those purchases are also made at a superstore.