Explaining the "Trendy Toy Craze": From Network Effects to Multiple Equilibria

“Man is by nature a political animal, but the human heart is not easily fathomed.” — Aristotle

Typical Facts about Pop Mart Products

In Pop Mart’s business conception, the collectible toy economy should first emerge in developed countries.

The economic theory is quite simple:

Consumption is divided into subsistence and developmental; developmental consumption can only be satisfied after subsistence needs are met.

However, the actual situation is—Asian developing countries have responded more rapidly to the collectible toy market than developed countries.

• From a micro perspective, individuals are willing to tighten their belts for the “guzi economy” (collectible toy economy);
• From a macro perspective, current social consumption upgrading is accompanied by declining birth rates¹.

Reflected in specific functional relationships, the typical facts about products like Pop Mart are:

When supply falls short of demand, prices (at least official prices) remain largely unchanged, while Pop Mart’s scalper prices have recently experienced a decline (around July 2025).

This means:

• First, Pop Mart is not a Giffen good², as its pricing is not cheap, defined as developmental consumption rather than an inferior good.
• It cannot be explained by price stickiness from Keynesian theory, as there is no union involvement here, and menu costs (the costs of changing prices) are low.
• Pop Mart’s official prices often don’t increase much, and its market prices hover near a certain high point, falling into a temporary equilibrium³.
• Pop Mart’s popularity is quite inexplicable; therefore, if Pop Mart launches another product, sales might explode or receive no attention (characteristic of viral products).

Incorporating Conspicuous Consumption into the Model

The viewpoint is simple; here we mainly look at how to incorporate it into economic theoretical models.

Meanwhile, in a 1991 University of Chicago economics class, Nobel laureate Gary S. Becker⁴ posed a question—why does a famous seafood restaurant he likes, with so many daily customers, never raise its prices?

This phenomenon is widespread—during periods without scalpers (resellers), many successful restaurants, theaters, sports events, and other activities do not raise prices even under sustained excess demand.

Traditional Microeconomic Model

In this price-demand diagram, $d_0$ represents the production function⁵, $d_1$ represents the demand function. $s$ is the number of seats in the popular restaurant. Currently, the popular restaurant faces demand exceeding supply, corresponding to price level $p_0$. Clearly, when the price increases to $p_e$, the restaurant could earn more. Raising the price to $p_{max}$, profits depend on the elasticity of both sides.

Model with Conspicuous Consumption

When consumers purchase goods, they consider the market for these goods. For example, the value of subsequent posts on Xiaohongshu (Little Red Book), WeChat Moments, and group “screen resonance.” At this point, the demand function becomes:

$$ D=\sum d^{\prime}(p,D)=F(p,D),\quad F_p<0,F_d>0 $$

• Recursive structure—total market demand D is the sum of individual demands d, while each individual’s demand function considers total market demand D.
• The total market demand function still shows less demand at higher prices ($F_p<0$).
• The market also has a positive feedback structure: the more people buy, the more are attracted ($F_D>0$) (network effect).

Next, we differentiate the total demand function:

$$L(p,D)=F(p,D)-D=0$$ $$ dL=L_pdp+L_DdD=0 $$ At this point,

$$ L_p=F_p,\quad L_D=F_D-1 $$

Finally, we obtain:

$$ F_pdp+(F_D-1)dD=0 $$

Transforming, we get the rate of price change with respect to demand⁶:

$$ \frac{dp}{dD}=G_D=\frac{1-F_D}{F_p} $$ Here, $G_d$ represents the derivative of the inverse demand function with respect to demand d.

If the social effect is strong enough—$F_D>1$—then $\frac{1-F_D}{F_p}>0$. From the rate of change perspective—price increases as demand increases. Until the firm reaches the third-stage inflection point of production $p_{max}$ (compatible with traditional explanation, which is Figure 3’s content).

But now, based on the network model, there’s a new possibility—

When total demand is low, $F_D<1$; when total demand is high, $F_D>1$.

At this point, the total social demand function is no longer a monotonically declining line but a curve that first declines then rises.

This represents the multiple equilibria in reality! For example, pricing at $p^*$.

• If the product becomes an instant hit, with word-of-mouth spreading, then market demand accumulates to the $D_g^*$ level.
• If the product receives little attention, actual demand remains at the $D_b^*$ level.

Given this uncertainty, firms generally dislike overproduction ($s-D_b^*$). Therefore, firms tend to choose the equilibrium level where $MR=0$.

Significance of the Model

• This model explains why advertising and marketing are so important in real-world store experience (this is natural).
• The least obvious point is—why viral firms maintain conservative pricing during hot sales periods. The essence lies in uncertainty brought by network effects.
• The model elegantly depicts why equilibrium during the popular phase is so brief—price function adjustment space is limited—when network effects continue to weaken, prices automatically decline.
• Currently, there remains exploration space for variables characterizing network effects.

Stepping Back to Understand Network Effects

Individual utility is:

$$ U_i=U(x_i,y_i;X) $$

where $X=\sum x_{j}$ represents network effects.

Next, we solve for marginal conditions:

$$ MU_{x_i}=\frac{\partial U}{\partial x_i}+\frac{\partial U}{\partial X}\cdot\frac{\partial X}{\partial x_i} $$ If $\frac{\partial U}{\partial X}$ is large, it signifies a positive externality: when consumers purchase viral products, the additional satisfaction from social attributes may even exceed the negative utility from price increases.

From Network Effects to Complexity Economics

Network effects are similar to multiple structures of positive and negative feedback.

Just like the multiplier effect in Keynesian theory. Actually, Keynes also had the concept of multiple equilibria. An economy, under certain conditions, may have multiple equilibria.

Due to incomplete adjustment of interest rates, prices, and wages, society has a self-reinforcing effect. People’s sentiments alternate between optimism and pessimism and infect each other, which is what Keynes called “animal spirits.” Precisely because of this, adjustment of social expectations and regulation of economic signals are so important.

This is why Keynes⁷ said:

“In the short run, people’s psychological expectations and confidence (animal spirits) are more important than gold reserves.”

Economics today has moved toward complexity economics. Complexity economists emphasize network effects, heterogeneous agents, multiple equilibria in society. Actually, the explanation of network effects is also simple: I follow the rise and fall of social voices, but how to extract social voices and incorporate them into analysis? This is one of the most worthwhile issues to explore.