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Preference for Novelty and Price Behaviour

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  • S. Bertarelli
  • R. Censolo

Abstract

In this paper we motivate a specific formulation for preference that exhibits both love for variety and love for novelty. This enables to investigate the effects of ageing of imperfect substitutes, as they became progressively old-fashioned, due to the obsolescence of their aesthetic features. First, we assume that the industry is divided into several sub-markets, each dominated by a single firm that produces a variety of a given vintage. We show that equilibrium prices decrease, as goods become older. Assuming a fixed cost to be paid, the evolution of demand determines the equilibrium number of varieties at the point where the oldest vintage firm earns zero profits. Second, we consider the model under a free entry condition assumption. Each sub-market of a given vintage is saturated with a number of varieties such that the market share of each firm is barely sufficient to realise zero profits. We show in a particular case that, in equilibrium, markets of the youngest varieties are characterised by a larger number of firms than markets offering older varieties. More specifically, the lifetime horizon of each variety will be characterised by decreasing prices accompanied by increasing demand levels.

Suggested Citation

  • S. Bertarelli & R. Censolo, 2000. "Preference for Novelty and Price Behaviour," Working Papers 383, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:383
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    References listed on IDEAS

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    1. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
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    6. Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-373, June.
    7. Elliott Middleton, 1986. "Some Testable Implications of a Preference for Subjective Novelty," Kyklos, Wiley Blackwell, vol. 39(3), pages 397-418, August.
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    Cited by:

    1. Canoy, Marcel & van Ours, Jan C. & van der Ploeg, Frederick, 2006. "The Economics of Books," Handbook of the Economics of Art and Culture, in: V.A. Ginsburgh & D. Throsby (ed.), Handbook of the Economics of Art and Culture, edition 1, volume 1, chapter 21, pages 721-761, Elsevier.
    2. Jorge Alcaide-Marzal & Enrique Tortajada-Esparza, 2007. "Innovation assessment in traditional industries. A proposal of aesthetic innovation indicators," Scientometrics, Springer;Akadémiai Kiadó, vol. 72(1), pages 33-57, July.

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