A Theory of Conspicuous Consumption

This paper explains why some goods are purchased for conspicuous consumption at prices significantly above producers’ marginal costs. Moreover, it also explains the choice of goods that qualify for “conspicuous consumption” status. These results are obtained by modeling conspicuous consumption as a signaling game in which wealthy individuals signal their wealth to society in order to obtain higher social status. Conspicuous consumption is constrained by a discrete cost of display. This cost can be interpreted as arising from limited physical space, limited time for display, or both. We show that signaling by consuming a high-priced good can arise under general single-crossing property assumptions. We also derive the conditions under which consumers signal using price rather than quantity. Results show that the higher the cost of display, the more likely is the consumer to signal by purchasing high-price conspicuous goods. Moreover, the lower the free display space and time available, the higher the equilibrium price of the conspicuous-consumption good. Finally, it is shown that goods with higher variability of innate consumption utility in the cross-section of consumers are accepted as conspicuous goods at higher prices that those with lower variability.