Durable Goods and Conformity

Is the variety of products supplied in markets a reflection of the diversity of consumers’ preferences? In this paper, we argue that the distribution of durable goods offered in markets tends to be compressed relative to the distribution of consumers’ underlying preferences. In particular, there are strong incentives for conformity in markets for durable goods. The reason for conformity is natural: durables (for example houses) are traded and as a result, demand for these goods is influenced by their resale value. Agents may like one product, but purchase another because of resale concerns. We show that in markets for durable goods (1) there is a tendency to conform to the average preference; (2) conformity increases with increases in durability, patience, and the likelihood of trade; and (3) equilibrium conformity is not necessarily optimal. Surprisingly, there tends to be too little conformity in equilibrium. † University of Michigan. The authors gratefully acknowledge the comments of Kai-Uwe Kuhn, Miles Kimball, Greg Lewis, Yusufcan Masatlioglu, Daisuke Nakajima, Steve Salant, Dan Silverman, Lones Smith and Randy Wright. “Conformity, in terms of size, condition & features, tends to support your home’s market value more than anything else.” 1