UNU-MERIT Working Papers Series
Inertia, Interaction and Clustering in Demand
Zakaria Babutsidze & Robin Cowan #2009-045We present a discrete choice model of consumption that incorporates two
empirically validated aspects of consumer behaviour: inertia in
consumption and interaction among consumers. We specify the interaction
structure as a regular lattice with consumers interacting only with
immediate neighbours. We investigate the equilibrium behaviour of the
resulting system and show analytically that for a large range of initial
conditions clustering in economic behaviour emerges and persists
indefinitely. Short-run behaviour of the model is investigated
numerically. This exercise indicates that equilibrium properties of the
system can predict a short-run behaviour of the model quite accurately.
Key Words: Clustering, Interaction, Habits, Consumer choice
JEL codes: D11, D83, C65
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