Conspicuous Consumption, Pure Profits, and the Luxury Tax / Laurie Simon Bagwell, B. Douglas Bernheim.

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Bagwell, Laurie Simon

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w4163.Publication details: Cambridge, Mass. National Bureau of Economic Research 1992.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w4163 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w4160 Uncertainty, Investment, and Industry Evolution /	nber w4161 R&D Investment and International Productivity Differences /	nber w4162 Microeconomic Rigidities and Aggregate Price Dynamics /	nber w4163 Conspicuous Consumption, Pure Profits, and the Luxury Tax /	nber w4164 Economic Foundations of Cost Effective Analysis /	nber w4165 The Accuracy of Reports of Foreign Exchange Intervention /	nber w4166 Greenback Resumption and Silver Risk: The Economics and Politics of Monetary Regime Change in the United States, 1862-1900 /	Next

September 1992.

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.