Learning-by-consuming and the dynamics of the demand and prices of cultural goods

Abstract

The major distinctive feature of cultural goods is that consumers must learn how to consume them, implying that preferences should be modelled as intertemporally dependent. The canonical model in the literature uses a habit formation analogy. In this paper, we discuss in detail, though in the simplest setup, a consistent preference structure for that model. Then, we derive the implications for the dynamics of two aggregate equilibrium models, a fixed price model and a flexible price model. The learning-by-consuming behaviour is characterised by a preference structure displaying bounded adjacent complementarity in the demand for the cultural good. This implies that there will be short run complementarity between the stocks of culture and financial wealth and that the adjustment of the demand for cultural goods, or of their relative price, will have some inertia. In the exogenous price model, we find that increases in income will raise the long run demand for cultural goods while increases in the relative price will decrease it. In the endogenous price model, an increase in the supply of cultural goods will imply an initial undershooting of the price of cultural goods followed by an upward transition process. Our results seem to be consistent with the empirical results on the demand for cultural goods and seem to offer an explanation for the Baumol and Bowen paradox.