Inertia, Interaction and Clustering in Demand

Zakaria Babutsidze & Robin Cowan


We 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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