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Conspicuous Consumption, Pure Profits, and the Luxury Tax

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  • Laurie Simon Bagwell
  • B. Douglas Bernheim

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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  • Laurie Simon Bagwell & B. Douglas Bernheim, 1992. "Conspicuous Consumption, Pure Profits, and the Luxury Tax," NBER Working Papers 4163, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4163
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    Cited by:

    1. Aradom Gebrekidan Abbay & Roel Rutten & Hossein Azadi & Frank Witlox, 2018. "How Social Status Contributes to Sustainable Livelihoods? An Empirical Analysis in Ethiopia," Sustainability, MDPI, vol. 11(1), pages 1-24, December.

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