Bandwagons and the threat of chaos: Interpersonal effects revisited☆

Abstract This paper extends Granovetter and Soong's work on bandwagons by introducing interpersonal effects at the level of preferences rather than at the level of demand. It is found that markets generally will not follow the first-order difference equations analyzed by G-S, because consumers will form expectations based on the market's entire history rather than the last period alone. When those expectations are adaptive and the rate of expectations adjustment sufficiently low, the threat of unstable and chaotic dynamics is eliminated. The paper also describes the efficiency problems generated by interpersonal effects.