The Snob Effect

Network externalities are sometimes negative. Consider the snob effect, which refers to the desire to own exclusive or unique goods. The quantity demanded of a snob good is higher the fewer the people who own it. Rare works of art, specially designed sports cars, and made-to-order clothing are snob goods. Here, the value I get from a painting or sports car is in part the prestige, status, and exclusivity resulting from the fact that few other people own one like it.

Figure 4.15 illustrates the snob effect. Di is the demand curve that would apply if consumers believed only 2000 people owned the good. If people believe that 4000 people own the good, it is less exclusive, and its snob value is reduced. Quantity demanded will therefore be lower; the curve D4 applies. Similarly, if people believe that 6000 people own the good, demand is even smaller, and De applies. Eventually consumers learn how widely owned the good actually is, so the market demand curve is found by joining the points on the curves Di, £>4 Do etc., that actually correspond to the quantities 2000, 4000, 6000, etc.

The snob effect makes market demand less elastic. To see why, suppose the price were initially $30,000, with 2000 people purchasing the good, and was then lowered to $15,000. If there were no snob effect, the quantity purchased would increase to 14,000 (along curve Di). But as a snob good, its value is greatly reduced if more people own it. The snob effect dampens the increase in quantity demanded, cutting it by 8000 units, so the net increase in sales is only to 6000 units. For many goods, marketing and advertising are geared to creating a snob effect. This means that demand will be less elastic-a result that has important implications for pricing.

Negative network externalities can arise for other reasons. The effect of congestion is a common one. The value I obtain from a lift ticket at a ski resort is lower the more people there are who have bought tickets because I prefer short lines and fewer skiers on the slopes. And likewise for entry to an amusement park, skating rink, or beach.12

"Tastes differ, borne people associate a positive network externality with skiing or a day on the beach; they enjoy crowds and might find the mountain or beach lonely without them.

Snob Effect

-Pure Price Effect-»- (thousands per month)

Net Effect

-Pure Price Effect-»- (thousands per month)

Net Effect

FIGURE 4.15 Negative Network Externality: Snob Effect. A snob effect is an example of a negative network externality, in which the quantity of a good that an individual demands falls in response to the growth of purchases by other individuals. Here the demand for a good shifts to the left from D2 to De, as the price of the product falls from $30,000 to $15,000.

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  • Caradas
    What is a snob good demand curve?
    8 years ago

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