Close substitutes and upward-sloping demand curves

Abstract

It is well known that the 'law of demand' may fail in the case of inferior goods. It seems less appreciated that we can also have upward-sloping demand curves in other circumstances. This paper looks at cases in which demand refers to categories of goods that are close substitutes. Three situations are considered. The first concerns a quality differentiated commodity of which one variety is consumed. Examples of such products abound. The second situation refers to the use of a durable of which two units are present in the household. Cars are a natural example. The third concerns the long run demand curve for the use of a durable that is available in various qualities. One may again think of the car, but there are many other possibilities. In each of these cases economic theory does not exclude the possibility that demand functions are upward-sloping. Concrete specifications where this happens are provided. © Springer-Verlag Berlin Heidelberg 2012.