Conspicuous Consumption and Sophisticated Thinking

Abstract

Consumers purchase conspicuous goods to satisfy not only material needs but also social needs such as prestige. In an attempt to meet these social needs, producers of conspicuous goods like cars, perfumes, and watches, highlight the exclusivity of their products. In this paper, we propose a monopoly model of conspicuous consumption using the rational expectations framework, and then examine how purchase decisions are affected by the desire for exclusivity and conformity. We show that snobs can have an upward-sloping demand curve but only in the presence of consumers who are (weakly) followers. Laboratory tests lend support for this model prediction and for the rational expectations framework. The experimental results suggest that subjects used some degree of sophisticated thinking to arrive at their first-period decisions. Their behavior in the subsequent trials, however, can be adequately captured by a purely adaptive learning mechanism. We discuss the implications of consumer learning for optimal dynamic pricing policy by a monopolist.strategic thinking, experimental economics, game theory, rational expectations, conspicuous consumption, learning in games

Selling to Conspicuous Consumers: Pricing, Production, and Sourcing Decisions

“…We examine the cases when some consumers seek, purchase, and consume hard-to-find products to display their distinction from the other consumers in the population. Consistent with the literature (Leibenstein 1950, Amaldoss andJain 2005a), we term customers that are driven by such invidious comparisons as engaging in snobbish behavior.…”

“…4 Examples of such conspicuous products might include Chrisian Dior watches (Amaldoss and Jain, 2005a), Yves Saint Laurent shoes (Bruner and Hodrick 2005), "Cherry Blossom" Murakami bags (Amaldoss and Jain 2008).…”

“…Amaldoss and Jain (2005a) study the pricing decisions of a firm facing deterministic price-dependent demand, and show that snobs may exhibit an upwards sloping demand curve only in a heterogenous market.…”

“…As per Leibenstein (1950) and Amaldoss and Jain (2005a), we address these customers 6 We assume that demand distribution FD has increasing generalized failure rate (IGFR, Lariviere 2005). This is a mild assumption that fits many distributions including the Normal distribution, the Uniform distribution, the Gamma distribution, and the Weibull distribution.…”

“…This concept has been used in some recent Marketing and Operations papers (See for instance, Amaldoss and Jain (2005a), Jerath et al (2010), Su (2007)…”