Nova workboard

a blog from young economists at Nova SBE

Conspicuous Consumption

In consumer theory we tend to forget that consumers display a very broad pattern of behavior that in many cases falls out of our straightforward models. One of these cases is so called conspicuous consumption which has been defined as “the spending of money on and the acquiring of luxury goods and services to publicly display economic power”. In essence it consists in buying to show off (signaling if we want to get technical)

Generally 3 effects have been identified (related to conspicuous consumption) that have an impact on the way we model consumption choices: The bandwagon effect, the snob effect and the Veblen effect.

The bandwagon effect consists in an increased preference for goods which other people also have, and the more people have it the more the individual consumer wants it. The Snob effect is the exact opposite, the less a good is owned by other people the more the consumer wants it. Finally the Veblen effect relates to price, the pricier a good is the more we want to consume it to signal how wealthy we are.

So how exactly does this behavior falls out of our traditional models of consumption? In 3 beautiful words: Endogenous utility functions. Here we were thinking preferences are “given” and apparently they can also be a result of the way goods are consumed in a society. There have been attempts to model this behavior but not much attention has been devoted to this subject. One way is to model “status” as a good one can acquire by buying certain goods. One other way (related to the Veblen effect) is to attribute 2 prices to a good, the market price and the conspicuous price or the price that other people perceive the consumer has paid. When there is more information about prices those 2 will tend to be equal.

The reason all of this matters, other than trying to achieve a comprehensive consumer choice theory, is externalities. When a consumer buys a positional good (a goods that gives him status) someone else will lose status (and therefore utility) from the current goods he consumes and has to increase his expenditure in positional goods. This is commonly known as “keeping up with the joneses”, a zero-sum game if you will where no one benefits.

All of this may translate into public policy measures that are able to raise revenue without creating several distortions, for example, through taxes on luxury goods or through the provision of non positional goods such as public goods like health and education.

 

Jorge Moreira dos Santos nº616

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Author: studentnovasbe

Master student in Nova Sbe

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