Bandwagon effect

Bandwagon effect – and why Apple or Samsung sells more mobile phones

DEMONSTRATION EFFECT

We all have come across a desire to buy the same branded gadget which we see our peers using .Or some people always buy any new utility that is launched by their favourite brand on the first day of its launch even if they don’t need it.

Above are the examples of DEMONSTRATION EFFECT or BANDWAGON EFFECT that we usually see in the market.

Demonstration effect is the effect of a person’s behaviour, particularly in relation to consumption in economics.  James Duesenberry, an American economist, in his consumption theory, advocated that demonstration effect comes in to picture when one person starts to consume a good by seeing another person or to show someone and not because of his own original likes or dislikes.

In other words, when new commodities or new models of existing ones appear in the market (let us say in case of mobile phones like Iphone) rich people buy them first. One one hand some people buy new goods or new models because they have a genuine need for them while on the other some people buy because they want to exhibit their affluence.

But once these new commodities come in vogue, many households start buying them, not because they have genuine need for them but because their neighbours or others have bought them.

The purchases made by the latter category of buyers which may be due to feelings of competition, jealousy ,need for equality in peer group, social inferiority or the desire to increase social status lead to demonstration effect. This effect has a positive relation with the demand of the good in question. Hence, James Duesenberry recognized the significance of social influences on consumption decisions.He advocated  that the attainment of a materialistically high standard of living has become a “generally recognized social goal.”

Interestingly, the relative level of consumption of high quality goods is more important  than absolute level of consumption. An individual who consumes the same goods year after year will feel increasingly  worse off when his neighbours upgrade the quality of their consumption goods. It is because he will feel relatively less successful in achieving the goal of a high standard of living and so will suffer from a loss of self-esteem.

 

Why is the demonstration effect important in an economy?

This is because it allows consumption to increase while income levels stay the same, which in turn affects the levels of saving in an economy. Increase in income inequality leads to less saving, which leads to the lower classes never achieving sufficient capital to change their status- they are not motivated to work hard and succeed, on the aggregate.

Duesenberry in his theory claims that the satisfaction of every consumer is negatively affected by the consumption of those with higher incomes but unaffected by those with lower incomes, so to make everyone satisfies progressive income taxation should be used.

Robert Frank  another economist, suggests that the demonstration effect tells us that things like forced-savings requirements (i.e. Social Security), luxury taxes and working-hour limits would also help aggregate satisfaction. He points out that a higher standard of living for a few leads to a exponential ripple of dissatisfaction for many — mass media for example, advertising or lifestyle magazines which give a reflection of how others live, only multiples this effect, allowing the demonstration effect to percolate more. Here think of any toothpaste advertisement, let us say, SENSODYNE, showing individual consumers experience of combating with sensitivity and even if don’t have sensitive teeth  you will still be tempted to buy one.

The meaning of demonstration effect depends on the context in which it is used. For example in case of political science and sociology it is used to describe the fact that developments in one place will often act as a catalyst in another places. In economics, it may help in explaining the spread of financial or economic crises like the Asian financial crisis. Investors don’t always have all the information about the economic situation of countries in which they investing. They usually judge by looking at various factors like economic stability, interest rates, laws of investing and so on.

When investors see one country’s economy collapse, then, they may question the safety of investments in countries with similar economic policies.

Another example can be of poor countries trying to imitate the rich ones in a misconceived endeavour for industrialisation without having proper knowledge of factor prices. A relatively poor country cannot afford a nuclear reactor which may mainly serve as a status symbol.

In conclusion we can say that the demonstration effect has strong implications for the welfare state since the individual welfare indices will mainly relate either positively or negatively with incomes and life standards of others. All this alters the efficiency criteria and the fiscal policies required to rectify the inequalities.

Moreover, this effect shows a considerable explanatory power in relation to the introduction of new goods in the market and structure and development of total amount of spending.

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