Working Paper: NBER ID: w4163
Authors: laurie simon bagwell; b douglas bernheim
Abstract: We examine a model of conspicuous consumption and explore the nature of competition in markets for conspicuous goods. We assume that, in addition to intrinsic utility, individuals seek status, and that perceptions of wealth affect status. Under identifiable conditions, the model generates Veblen effects: utility is positively related to the price of the good consumed. Equilibria are then characterized by the existence of "budget' brands (which are sold at a price equal to marginal cost), as well as 'luxury" brands (which are sold at a price above marginal cost, despite the fact that producers are perfectly competitive). Luxury brands are not intrinsically superior to budget brands but are purchased by consumers who seek to signal high levels of wealth. Within the context of this model, an appropriately designed luxury tax is a non-distortionary tax on pure profits.
Keywords: conspicuous consumption; luxury tax; Veblen effects; pure profits; market competition
JEL Codes: D12; H22; L15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumers increase their demand for luxury goods (D12) | Veblen effects (D46) |
| Veblen effects (D46) | utility is positively related to the price of the good consumed (D11) |
| higher prices enhance perceived status (P22) | influences purchasing behavior (D12) |
| purchasing luxury brands (M31) | perceived social status derived from such consumption (D12) |
| luxury tax does not affect equilibrium price of luxury goods (H29) | prices are demand-driven (D49) |