NBER

Laurie Bagwell

Kellogg Graduate School of Management
Finance Department
Northwestern University
Evanston, IL 60208

Institutional Affiliation: Northwestern University

NBER Working Papers and Publications

September 1992Conspicuous Consumption, Pure Profits, and the Luxury Tax
with B. Douglas Bernheim: w4163
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 ...

Published: American Economic Review, vol. 86, no. 3, pp. 349-373, June 1996.

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