An Analysis of the Impact of Social Factors on Purchase Behavior
Consumers purchase conspicuous goods to satisfy not just material needs but also social needs such as prestige. In an attempt to meet these social needs, marketing managers of conspicuous goods like cars, perfumes, and watches employ several strategies to highlight the exclusivity of their products. These strategies include using exclusive distribution, charging high prices, and limiting production. Further, marketing textbooks suggest that the demand curve for prestige goods could be upward sloping and therefore firms should not set prices which are ``too low''. In this paper we examine whether the desire for exclusivity can lead to an upward-sloping demand curve. We also investigate how social factors such as the desire for exclusivity and conformity affect prices and firms' profits. To analyze these issues, we develop a model of conspicuous consumption using the rational expectations framework. We consider two different market structures: monopoly and duopoly. Our results shows that the desire for exclusivity can lead to an upward-sloping demand curve when there is a segment of consumers who are (weakly) conformists. The impact of exclusivity and conformity on prices and profits varies with the market structure. Interestingly, an increase in perceived functional differentiation of products consumed by snobs could decrease firms' profits and prices. In the laboratory, we observe an upward sloping demand curve for snobs, in both the monopoly and duopoly setting. We also track consumer's expectations, and find on average that subjects' beliefs are consistent with the observed outcome and the rational expectations equilibrium solution.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Naylor, Robin & Cripps, Martin, 1993.
"An economic theory of the open shop trade union,"
European Economic Review,
Elsevier, vol. 37(8), pages 1599-1620, December.
- Naylor, R. & Cripps, M., 1991. "An Economic Theory of the Open Shop Trade Union," The Warwick Economics Research Paper Series (TWERPS) 372, University of Warwick, Department of Economics.
- Belk, Russell W, 1988. " Possessions and the Extended Self," Journal of Consumer Research, Oxford University Press, vol. 15(2), pages 139-168, September.
- Corneo, Giacomo & Jeanne, Olivier, 1997. "Conspicuous consumption, snobbism and conformism," Journal of Public Economics, Elsevier, vol. 66(1), pages 55-71, October.
- Reinganum, Jennifer R., .
"Innovation and Industry Evolution,"
426, California Institute of Technology, Division of the Humanities and Social Sciences.
- Stanley M. Besen & Joseph Farrell, 1994. "Choosing How to Compete: Strategies and Tactics in Standardization," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 117-131, Spring.
- Frederic S. Mishkin, 1983.
"Are Market Forecasts Rational?,"
in: A Rational Expectations Approach to Macroeconomics: Testing Policy Ineffectiveness and Efficient-Markets Models, pages 59-75
National Bureau of Economic Research, Inc.
- Corneo, Giacomo & Jeanne, Olivier, 1997. "Snobs, bandwagons, and the origin of social customs in consumer behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 32(3), pages 333-347, March.
- Charles D. Kolstad & Lars Mathiesen, 1987. "Necessary and Sufficient Conditions for Uniqueness of a Cournot Equilibrium," Review of Economic Studies, Oxford University Press, vol. 54(4), pages 681-690.
- Barzel, Yoram & Suen, Wing, 1992.
"The Demand Curves for Giffen Goods Are Downward Sloping,"
Royal Economic Society, vol. 102(413), pages 896-905, July.
- Barzel, Y. & Suen, W., 1991. "The Demand Curves for Giffen Goods are Downward Sloping," Discussion Papers in Economics at the University of Washington 91-18, Department of Economics at the University of Washington.
- Barzel, Y. & Suen, W., 1991. "The Demand Curves for Giffen Goods are Downward Sloping," Working Papers 91-18, University of Washington, Department of Economics.
- Dwyer, Gerald Jr., 1981. "Are expectations of inflation rational? or Is variation of the expected real interest rate unpredictable?," Journal of Monetary Economics, Elsevier, vol. 8(1), pages 59-84.
- Gary S. Becker, 1991.
"A Note on Restaurant Pricing and Other Examples of Social Influences on Price,"
University of Chicago - George G. Stigler Center for Study of Economy and State
67, Chicago - Center for Study of Economy and State.
- Becker, Gary S, 1991. "A Note on Restaurant Pricing and Other Examples of Social Influences on Price," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 1109-1116, October.
- Schmalensee, Richard, 1976. "An Experimental Study of Expectation Formation," Econometrica, Econometric Society, vol. 44(1), pages 17-41, January.
- David Romer, 1984. "The Theory of Social Custom: A Modification and Some Extensions," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 717-727.
- Colin Camerer & Teck-Hua Ho, 1999. "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, Econometric Society, vol. 67(4), pages 827-874, July.
- Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
- Frank, Robert H, 1985. "The Demand for Unobservable and Other Nonpositional Goods," American Economic Review, American Economic Association, vol. 75(1), pages 101-116, March.
- Drew Fudenberg & Jean Tirole, 1999.
"Customer Poaching and Brand Switching,"
Harvard Institute of Economic Research Working Papers
1871, Harvard - Institute of Economic Research.
- Heiner, Ron, 1974. "A Reformulation of the Law of Demand," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 577-83, December.
- Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992.
"A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades,"
Journal of Political Economy,
University of Chicago Press, vol. 100(5), pages 992-1026, October.
- Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 2010. "A theory of Fads, Fashion, Custom and cultural change as informational Cascades," Levine's Working Paper Archive 1193, David K. Levine.
- Williams, Arlington W, 1987. "The Formation of Price Forecasts in Experimental Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 1-18, February.
- Milgrom, Paul & Roberts, John, 1986.
"Price and Advertising Signals of Product Quality,"
Journal of Political Economy,
University of Chicago Press, vol. 94(4), pages 796-821, August.
- Leiderman, Leonardo, 1980. "Macroeconometric testing of the rational expectations and structural neutrality hypotheses for the United States," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 69-82, January.
- Dierker, Egbert, 1972. "Two Remarks on the Number of Equilibria of an Economy," Econometrica, Econometric Society, vol. 40(5), pages 951-953, September.
- Rapoport, Amnon & Boebel, Richard B., 1992. "Mixed strategies in strictly competitive games: A further test of the minimax hypothesis," Games and Economic Behavior, Elsevier, vol. 4(2), pages 261-283, April.
- Bagwell, Laurie Simon & Bernheim, B Douglas, 1996. "Veblen Effects in a Theory of Conspicuous Consumption," American Economic Review, American Economic Association, vol. 86(3), pages 349-373, June.
- Smith, Vernon L, 1982. "Markets as Economizers of Information: Experimental Examination of the "Hayek Hypothesis"," Economic Inquiry, Western Economic Association International, vol. 20(2), pages 165-79, April.
- Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
- Surendra Rajiv & Shantanu Dutta & Sanjay K. Dhar, 2002. "Asymmetric Store Positioning and Promotional Advertising Strategies: Theory and Evidence," Marketing Science, INFORMS, vol. 21(1), pages 74-96, October.
- Richard J. Rosen, 1988.
"Research and development with asymmetric firm sizes,"
Finance and Economics Discussion Series
17, Board of Governors of the Federal Reserve System (U.S.).
- Richard J. Rosen, 1991. "Research and Development with Asymmetric Firm Sizes," RAND Journal of Economics, The RAND Corporation, vol. 22(3), pages 411-429, Autumn.
- Chao, Angela & Schor, Juliet B., 1998. "Empirical tests of status consumption: Evidence from women's cosmetics," Journal of Economic Psychology, Elsevier, vol. 19(1), pages 107-131, February.
- Partha Dasgupta & Eric Maskin, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 1-26.
When requesting a correction, please mention this item's handle: RePEc:bep:rmswpp:2-1-1021. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.