Heterogeneity and Increasing Returns May Drive Socio-Economic Transitions

TL;DR

This paper introduces a mathematical model to analyze how heterogeneity among consumers and increasing returns can drive the transition towards environmentally beneficial products, explaining why green products may eventually dominate markets.

Contribution

It presents a novel dynamic model incorporating consumer heterogeneity, product hierarchy, and increasing returns to explain socio-economic transitions toward green products.

Findings

Green products can dominate markets through consumer heterogeneity and increasing returns.

The model forecasts irreversible market transitions influenced by consumer dynamics and policies.

It provides a framework for understanding technology substitution in heterogeneous populations.

Abstract

There are clear benefits associated with a particular consumer choice for many current markets. For example, as we consider here, some products might carry environmental or `green' benefits. Some consumers might value these benefits while others do not. However, as evidenced by myriad failed attempts of environmental products to maintain even a niche market, such benefits do not necessarily outweigh the extra purchasing cost. The question we pose is, how can such an initially economically-disadvantaged green product evolve to hold the greater share of the market? We present a simple mathematical model for the dynamics of product competition in a heterogeneous consumer population. Our model preassigns a hierarchy to the products, which designates the consumer choice when prices are comparable, while prices are dynamically rescaled to reflect increasing returns to scale. Our approach allows us to model many scenarios of technology substitution and provides a method for generalizing market forces. With this model, we begin to forecast irreversible trends associated with consumer dynamics as well as policies that could be made to influence transitions