Work

Conspicuous Consumption, Pure Profits, and the Luxury Tax

Year: 1992

Type: report

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.

Source: National Bureau of Economic Research

DOI: 10.3386/w4163

Authors: Laurie Simon Bagwell, B. Douglas Bernheim

Institutions: Northwestern University, National Bureau of Economic Research, Princeton University

Language: English

Topic: Consumer Behavior in Brand Consumption and Identification

Subfield: Marketing

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

Funder: National Science Foundation

Award: Informational Imperfections and Economic Behavior

OpenAlex ID: W1560073961

Cites: 13

Cited by: 10

Related to: 10