Fashion, fads and the popularity of choices: micro-foundations for diffusion consumer theory

TL;DR

This paper develops a discrete choice model where consumers learn from peers, leading to heterogenous knowledge, the emergence of fads and fashions, and complex diffusion dynamics that differ from traditional instantaneous adoption models.

Contribution

It introduces a novel evolutionary framework for product diffusion based on peer learning and heterogenous consumer knowledge, contrasting with standard models assuming instant adoption.

Findings

Heterogenous consumer knowledge leads to fads and fashions.

Aggregate preferences lose transitivity due to peer learning.

Non-equilibrium, path-dependent diffusion dynamics emerge.

Abstract

Knowledge acquisition by consumers is a key process in the diffusion of innovations. However, in standard theories of the representative agent, agents do not learn and innovations are adopted instantaneously. Here, we show that in a discrete choice model where utility-maximising agents with heterogenous preferences learn about products through peers, their stock of knowledge on products becomes heterogenous, fads and fashions arise, and transitivity in aggregate preferences is lost. Non-equilibrium path-dependent dynamics emerge, the representative agent exhibits behavioural rules different than individual agents, and aggregate utility cannot be optimised. Instead, an evolutionary theory of product innovation and diffusion emerges.