Conspicuous Consumption, Pure Profits, and the Luxury Tax

Laurie Simon Bagwell and B. Douglas Bernheim
Authors registered in the RePEc Author Service: Laurie Simon Hodrick

No 4163, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1992-09
Note: PE
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Citations: View citations in EconPapers (1)

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

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