From Flags to Products: Nationalism and Consumer Choices

In this paper, we propose a theoretical model of nationalism in consumption, aiming to uncover its effects on market outcomes and welfare. Nationalism is catalyzed by the perception of higher quality for domestic goods, which in turn provides a utility benefit. We construct a two-country setting of vertical product differentiation where consumers exchange consumption habits in social interactions, potentially spreading nationalism from one country to another. Consumers are heterogeneous with respect to their level of income. We demonstrate that in a globalized economy, in the realm of nationalism, intercountry meetings are mainly detrimental for firms producing high-quality goods and for low-income consumers. Our research highlights how the rising tension between nationalism and globalization manifests in consumption as a demarcation between those favoring a borderless world and its opponents who promote national attachment. The effects of these tensions are far from being evident.