# Patterns of consumption in socio-economic models with heterogeneous interacting agents.

## I Introduction

A great body of literature has been devoted to the effects that interactions among consumers or firms (henceforth called agents) have on the macroeconomic variables of social-economic systems (Aoki 1996). Applications range from consumption theory, economic growth, opinion formation, stock market prices and emergence of de facto standards in technology choice (see Kirman (1997) and Durlauf (1997) for recent reviews).

A common feature of many aggregate variables is that they exhibit oscillatory behaviour, showing boom-and-bust patterns. Examples are fad and bandwagon behaviour in sociology, business cycles in economics, bubbles in stock market prices, wave behaviour in the adoption of innovation technology. Boom-and-bust cycles have been observed (Persons et al. 1996) also in the adoption of financial technologies, like the CMO (collateralized mortgage obligations) and the LBO (leveraged-buyout) waves of 1980s, the merger and aquisition waves of the 1890s, 1920s and 1960s as well the takeover wave of the 1980s.

Such oscillatory behaviour can be explained in terms of interacting agents if an individual’s consumption decision depends on the behaviour of different group of consumers. Various models have been introduced (Kirman 1996, Durlauf 1996), with interactions among agents depending on the agents’ “distance” (such as, for example, differences in wealth) but typically in these models agents interact in a symmetric way with each other.

Recently Cowan, Cowan and and Swan (1998), hereafter (CCS), introduced a model where the utility of an individual agent can be positively or negatively affected by the choices of different groups of agents and consumption is driven by peering, imitiation and distinction effects. In CCS (1998), consumers are ordered according to their social status and are affected by the behaviour of other agents depending on their relative location on the spectrum. Agents wish to distinguish themselves from those who are below and emulate their peers and those who are above in the social spectrum.

Even though this model is capable of reproducing consumption waves, which emerge from the interplay between aspiration and distinction effects, it lacks an important ingredient, namely costs of consumption.

We reformulate here the model of paper CCS (1998) in the framework of statistical mechanics of disordered systems, incorporating costs of consumption which vary across agents and are exogenously determined. The dynamical properties of the model are explored, by numerical simulations, for different choices of the parameters. Various complex patterns are found.

## II Model

We consider N agents, ordered on a one-dimensional continuum space according to their “wealth” $`w_i`$. In this paper wealth serves as an index of social status rather than the source of a budget constraint, as discussed below. A more realistic situation with consumers arranged over a multidimensional space (accounting, for example, for differences in age, education, etc.) should be considered, but for simplicity we will only discuss here the case $`d=1`$. Agents’ wealth is chosen randomly, it is uniformly distributed between zero and $`W_0`$, and does not change with time.

Time evolves discretely and at each step the state of the agent $`i`$ is characterezied by a variable $`S_i`$ which can take only two values $`\pm 1`$; if agent $`i`$ chooses to consume then $`S_i=1`$ while if (s)he chooses not to consume then $`S_i=1`$.

At time zero a new product appears in the market and each agent decides whether or not to consume one indivisible unit of it, doing so if this provides positive utility (for example a new restaurant opens at time zero and in each subseqent time period agents decide whether to visit it or not). Utility $`Y_i(t)`$ <sup>*</sup><sup>*</sup>*It corresponds to a Hamiltonian interaction: $`H=_{i=1}^NY_i(t)S_i(t)`$. is affected by idiosyncratic preferences and costs as well as externalities from other agents:

$$Y_i(t)=\frac{1}{N}\underset{j=1}{\overset{N}{}}J_{ij}S_j(t)+G(w_i)+Cc_i+Nn_i(t)$$
(1)   
Individual costs, $`c_i`$ are uniformly distributed in the interval $`(1,0)`$ and the functional form of the intrinsic value $`G(w_i)`$ of the good for different agents will be specified below. In this partial equilibrium set-up with only one good, the decision on whether to buy the good or not depends only on whether the “marginal” utility of buying one unit exceeds the “marginal” cost. In this sense, all agents are assumed to possess sufficient liquidity at all points of time and wealth constraints are never binding.

A product with $`G=0`$ is called a “fashion” good, while a “status” good has a positive intrinsic value that might be well-suited to the characteristics or tastes of a particular class of consumers. The idiosyncratic noise term $`n_i`$, describes individual preferences which can change with time, and are random uniformly distributed in the interval $`(1,1)`$.

Each agent interacts with all the others, and the coupling constants $`J_{ij}`$ are functions of the agents’ status according to:

$$J_{ij}=J_A\mathrm{arctan}(w_iw_j)+J_S\left[\frac{\pi }{2}\mathrm{arctan}|w_iw_j|\right]$$
(2)   
The coefficients $`J_A,J_S`$ are taken positive. The asymmetric term, proportional to $`J_A`$, gives a negative contribution to the utility function $`Y_i`$ if $`w_i>w_j`$ and a positive contribution if $`w_i<w_j`$. This means that agent $`i`$ wishes to distinguish herself from the poorer while imitating the richer. The second contribution, proportional to $`J_S`$, always generates positive utility and expresses peering effects among consumers of similar status. Both of these contributions saturate with distance. In Fig. (1.a) $`J_{ij}`$ is plotted as a function of $`(w_iw_j)`$.

At each time $`t`$, we let agents re-evaluate their consumption decision, relative to the one taken one step before, on the basis of the utility $`Y_i(t)`$ they receive at the same time. This amounts to assuming that agents are myopic or that they face a complete absence of opportunities for intertemporal arbitrage, i.e. there are no capital markets. Agents choose simultaneously, that is, our system evolves with parallel dynamics. We have further allowed the possibility that only a fraction $`\alpha `$ of the total population reconsider their decision, with this subpopulation picked randomly at each time step. In the following though we shall consider only the case $`\alpha =1`$.

An alternative scenario that will be considered (which we call Model II henceforth) is when $`J_S=0`$ and the asymmetric influences exercised by agents on the others are given by:

$$J_{ij}=\mathrm{arctan}\frac{J_A}{w_iw_j}$$
(3)   
$`J_{ij}`$ is shown in Fig. (1.b). In this case there are only distinction-aspiration effects, which are stronger for agents of similar status and vanish at large distance. This describes the situation where agents segregate in social-economic groups so that among members of the same group there is a tendency to outshine their peers and to ignore the rest.

In both cases, the coupling constants $`J_{ij}`$ are random numbers (positive or negative) which provides an analogy with spin-glass models (Mezard et al. 1987). The peculiar properties of spin-glasses have attracted considerable attention (Aoki 1996, Arthur et al. 1988, Arthur et al.1997) in social-economic disciplines, particularly towards the possible implications, in that context, of the degeneracy of the equilibrium state and of the slow relaxation dynamics to equilibrium (aging).

We stress though that in our formulation the coupling constants are not symmetric and we do not expect our model to share the nice properties of spin glasses (Crisanti et al. 1988, Cugliandolo et al. 1997). Nonetheless a study (Iori et al. 1997) on the Sherrington-Kirkpatrick (SK) model with a non-hamiltonian contribution (i.e. taking $`J_{ij}=J_{ij}^S+ϵJ_{ij}^A`$) has shown that both the dynamical behaviour and the nature of equilibrium (at least for small lattices) survives for a small asymmetric perturbation. In view of this result it could be interesting to repeat the study of Iori et al. (1997) when $`ϵ`$ is zero for all but a certain fraction of the $`(i,j)`$ pairs, for which pairs, $`ϵ`$ can be large. This case would be similar to the model proposed in eq. (1).

Eventually, the case of our model in eq. (1) with $`J_A=0`$ (i.e. considering only peering effects) would be a natural framework to study the problem of technological progress. In this case, indeed, while peering finds a natural interpretation in terms of the advantage that interacting firms have (for example those who share a partnership) for being at a similar technological level (see Arenas et al.(1999), aspiration and distinction effects do not affect the payoff a firm receives from adopting a new technology. When $`J_A=0`$, eq. (1) describes a modified Random Field Ising Model (RFIM) with site dependent couplings. At zero temperature, when adiabatically driven by an external field, the RFIM is characterized by avalanche dynamics. In our model the role of the external field is played by costs.

## III Simulations and Results

### A Model I

We have performed computer simulations to study the model in eq. (1) above for different choices of the parameters and explored the various patterns observed. We studied both the time evolution of total consumption as well as the shape of the distribution of consumption across the social spectrum.

The pictures we show refer to a relatively small lattice of $`V=800`$ consumers (for the graphics we are limited by the size of the screen). We analyzed however larger lattices ($`V=4000`$) and results do not qualitatively change with the lattice size. Agents’ wealth is uniformly distributed in the interval $`(0,W_0)`$ with $`W_0=100`$ and does not change with time.

We assume that, when a new good enters the market, agents initially do not consume it ($`S_i(0)=1`$). We could have alternatively chosen a nonhomogeneous initial condition (with consumption distributed across agents with a certain probability) and study how the system evolves towards the equilibrium state.

Initially we study the case of a fashion good ($`G=0`$), choosing $`C=N=0`$. We explore the different consumption patterns when fixing $`J_A`$ and increasing $`J_S`$. For $`J_S`$ small (region I) the total consumption exhibits waves, with amplitude less than $`V`$ and high frequency. As $`J_S`$ is increased the period of oscillations increases and the amplitude becomes almost equal to $`V`$. The situation is depicted in Fig. (2) for $`J_A=1`$ and $`J_S=2,15,25`$. In Fig. (3) we show a typical pattern, for $`J_A=1,J_S=25`$, as a function of time (time increases from top to bottom). Notice that it is the rich who start consuming first in order to distinguish themselves from the poor. At the beginning of each cycle consumption propagates rather slow but it spreads faster as it moves down to the poorer. As we keep increasing $`J_S`$ though, the waves disappear and the system develops a steady-state behaviour with a variety of consumption patterns: above the value $`J_S^c`$ where waves disappear, we first find a narrow region (region II) where all but the richest consume. Still increasing $`J_S`$ we find a region (region III) where only the rich consume but not the rest, while if we further increase $`J_S`$ (region IV) nobody consumes as distinction effects are not strong enough to initiate the process. Simulations for these three regions are shown in Fig. (4). The precise location of these four regions in the $`J_A,J_S`$ region is depicted in Fig. (5) for a $`800`$ lattice.

Up to now we have assumed that agents do not have specific preferences for the new good. When introducing preferences, these act like the temperature in a physical system and can induce a transition from an equilibirum state to another. In our model, for example, as we turn on idiosyncratic noise ($`N>0`$), in region I waves become blurred with consumption greater than zero and less than $`V`$, while for $`J_A=1,J_S=0,N=1`$, Fig. (6), we see curiously the emergence of modulated waves. Eventually, for values of $`N>0`$, consumption waves emerge also in region IV (a larger $`N`$ is required the deeper one is in region IV) where, at $`N=0`$, nobody would consume.

Next we introduce costs ($`C>0`$) while keeping $`G=0`$ (or small compared to costs). For cost below a certain value (we find $`C_c=0.465`$ for $`J_A=1`$ and $`J_S=25`$) waves still emerge and propagate across all the social spectrum, but if $`C>C_c`$ the equilibrium state is characterized by nobody consuming. Adding noise, at $`N1`$ consumption waves, of varying amplitude, emerge spontaneously even at $`C>C_c`$, though at irregular time intervals (see Fig. (7)). Nonetheless if $`N_i`$ becomes much larger, waves disappear and total consumption, disorderely distributed, fluctuates around a constant level.

Also initial conditions can have an important role on the dynamical selection of the different asymptotic states: in Fig. (8) we show that imposing an initial condition with a fraction (here the top 10% of the population) of the agents consuming, then a consumption wave is generated even for $`C>C_c`$.

Finally we consider the general case of a status good, which has an intrinsic value ($`G(w_i)>0`$) for some agents $`i`$ and its consumption entails costs ($`C_i>0`$). We consider the case of a good which is more suitable to this group of consumers whose wealth is distributed around a given value $`w_m`$, and we choose:

$$G(w_i)=\frac{G}{(w_iw_m)^2}$$
(4)   
The results which follow refer to the case $`J_A=1,J_S=25,G=1,N=0`$. We fix costs at a level higher than $`C_c`$, estimated before for the case $`G=0`$ (below this value waves propagate even in the case of a fashion good). Different behaviours are found, depending on costs and/or $`w_m`$. For $`w_m<85`$, (we remind that agents’ wealth is distributed between zero and $`W_0=100`$), the good enters the social spectrum around $`w_m`$, possibly migrates through the closest social classes and then finds a stable niche (see top three cases in Fig. (9)). If $`w_mW_0`$, for costs not too high (but still larger than $`C_c`$), waves emerge and spread throughout the whole social spectrum (bottom case in Fig. (9)).

The effect of adding idiosyncratic preferences is again to induce waves in regions where, in its absence, consumption would reach a constant level and would be limited to a few consumers.

### B Model II

In this case, as we said, only aspiration/distinction effects affect the consumption behaviour of agents. We will focus only on short range interactions (e. g. choosing $`J_A=1`$) while, for larger values of $`J_A`$, as can be seen from Fig. (1a)), the potential becomes longer range.

We will compare Model II with Model I assuming $`J_S=0`$. While consumers feel in both cases (only) distinction and aspiration effects, their strength of interaction changes differently with distance, becoming zero at large distances for Model II, while it is finite and non-zero for Model I. Moreover at short distances the potential is large and sharp for model II while it is almost zero for Model I.

Starting with $`C=G=N=0`$, both models show oscillations in total cosumption, the amplituide of which is smaller in Model II compared to Model I (Fig. (10)). Nevertheless the consumption pattern in the two models is clearly different (Fig. (11)): in Model II there are no diffusing waves but a more chaotic situation with different social groups consuming at different times. This effect is better captured by Fig. (12) where we plot the consumption density at different locations along the social spectrum and at different times. We can see that consumption as a function of class is multi-peaked. We also found that the period of oscillations in Model II changes very little with $`J_A`$ despite the fact that the potential becomes longer-range as $`J_A`$ increases. This is a consequence of the sharp increase of the potential at short distance, so that the main contribution to the utility function $`Y_i`$ comes, even at large values of $`J_A`$, mainly from nearest-agent interactions.

Adding costs, while keeping $`G=N=0`$, generates market segmentation. The larger the costs are (Fig. (13 (a) and (b) )) the more sparse the consumption becomes. It is interesting though that even with high costs some agents still choose to consume out of their desire to distinguish themselves from their peers.

Finally, we study the case of a value good (Fig. (13 (c), (d) and (e))) which would mostly suit consumers whose wealth is close to a reference level $`w_m`$. In this case the good finds a stable niche: those agents who benefit from its consumption continue to consume the good (inducing possibly fringes to their neighours), but their behaviour does not affect distant social groups (not even when it is for the richest that the good has an high intrinsic value).

Adding idiosyncratic preferences in all of the above cases only generates occasional additional consumption in the patterns above but does not change the asymptotic behaviour of the system. Let us finally comment that even if we take $`J_A`$ large (in which case the interaction becomes long-range), we do not obtain waves that spread smoothly like in Model I, and this is due to the absense of peering for nearby consumers.

## IV Conclusions

In this paper we have focused on a potentially important mechanism that drives consumption decision: the interaction among heterogeneous consumers. In the sociology literature, interactions among individuals, belonging to similar or different social circles, are often seen as a major mechanism that determines new styles of behaviour. In model I we studied how peering, distinction and aspiration effects, together with costs and intrinsic values of a good, generate different consumption patterns, under the assumption that information on the consumption behaviour of agents is public ($`J_A`$ and $`J_S`$ are long range and saturate to a finite value at large distances). However collective behaviour may be affected by the structure of the communication channels. Models with imperfect information diffusion and social segregation in the way knowledge is transmitted have been proposed to explain fashion cycles (Corneo et al. 1994) . We take into account the possible local nature of interactions in model II where the $`J_{ij}`$ decay rapidily to zero with social distance.

Both models present different consumption regimes: a dynamical one characterized by waves and cycles plus a variety of stationary patterns. The two models, though, appear very different in the way consumption is spatially distributed. Initial conditions combined with random individual preferences may have a major role in pushing the dynamics of the system into one of the different asymptotic states.

To conclude we point that it would be interesting to compare patterns of consumptions for different choices of the distribution of agents’ wealth, such as, for example, a discontinuous distribution with gaps in the social spectrum or a gaussian distribution centered around a given social class.

## Acknowledgments

We are grateful to S. Jafarey for helpful comments. V.K. acknowledges the support of the General Secretariat of Research and Technology, Greece, under contract 45890. V.K also wishes to thank the University of Essex for the kind hospitality provided during the initial stages of this work.

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