Piracy versus Monopoly in the Market for Conspicuous Consumption
University of London, Royal Holloway College - Department of Economics
When luxury purchases signal the incomes of buyers, a monopoly will deliver signals efficiently. If competitors sell counterfeit copies of luxury goods at low prices, consumers will have to buy larger quantities to transmit the same signal, which wastes resources. Entrants do maximal harm when they produce indistinguishable replicas of existing luxury goods which causes prices to fall the furthest. Pooling, where agents do not signal, can deliver a welfare improvement over the separation that occurs under classical monopoly and competition. But only a powerful monopoly that can determine which goods are marketed can enforce this outcome. Finally, 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.
Number of Pages in PDF File: 34
Keywords: conspicuous consumption, piracy, separation, pooling
JEL Classification: D11, D42, D82, H21, L10
Date posted: March 29, 2012 ; Last revised: July 22, 2014
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