Piracy Versus Monopoly in the Market for Conspicuous Consumption

Abstract:     
When luxury purchases signal buyers' incomes, a monopoly provider of the luxury good can deliver the signals with greater efficiency than competitive providers. Specifically, if new entrants are permitted to sell counterfeit goods at competitive prices, the effectiveness of signalling will be unchanged but the quantity of goods purchased will increase, thereby increasing costs. We also show there is a trade-off among the goods that can serve as income signals: the goods that signal efficiently display a large gap between between marginal cost and the price a monopoly charges, but the same goods offer the greatest rewards to counterfeiting. When agents signal using the quality rather than the quantity of the good they buy, a monopolist may decide to offer a narrow menu of qualities that forces consumers to pool. Pooling can be welfare-enhancing in this case but it will lead to inefficiently high costs.

Number of Pages in PDF File: 22

Keywords: conspicuous consumption, piracy, separation, pooling

JEL Classification: D11, D42, D82, H21, L10

working papers series