Dress to Impress: Brands as Status Symbols

Abstract

We analyzed the market for indivisible, pure status goods. Firms produce and sell different brands of pure status goods to a population that is willing to signal individual abilities to potential matches in another population. Individual status is determined by the most expensive status good one has. There is a stratifi…ed equilibrium with a fi…nite number of brands. Under constant tax rates, a monopoly sells different brands to social classes of equal measure, while in contestable markets, social classes have decreasing measures. Under optimal taxation, contestable markets have progressive tax rates, while a monopoly faces an adequate ‡flat tax rate to all brands. In contrast with extant literature, subsidies may be socially optimal, depending on the parameters in both market structures.

Keywords: brand, competition, free entry, matching, monopoly, signaling, status, tax, welfare

JEL Classification: C78, H23, L12, L15