Conspicuous Consumption, Pure Profits, and the Luxury Tax

39 Pages Posted: 7 Apr 2004

See all articles by Laurie Simon Hodrick

Laurie Simon Hodrick

Columbia Business School - Finance and Economics

B. Douglas Bernheim

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 1992

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.

Suggested Citation

Hodrick, Laurie Simon and Bernheim, B. Douglas, Conspicuous Consumption, Pure Profits, and the Luxury Tax (September 1992). NBER Working Paper No. w4163. Available at SSRN: https://ssrn.com/abstract=303543

Laurie Simon Hodrick

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

B. Douglas Bernheim (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-8732 (Phone)
650-725-5702 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
108
Abstract Views
1,451
rank
251,291
PlumX Metrics