A Theory of Minimalist Luxury

Abstract

In this paper, we incorporate incomplete information about consumer wealth and presence of high-quality counterfeits to investigate when a consumer may engage in moderate as opposed to excessive or conspicuous consumption to signal his/her wealth. Past literature has shown that when wealth is not observable, the wealthy are motivated to outspend the unwealthy to signal their wealth. We show in a single model, however, that when high-quality counterfeits exist, conspicuous consumption as a signal for wealth may no longer be effective. Instead, the wealthy may purposefully restrain from consumption of luxury goods to separate themselves from the rest and hence less can be more in signaling wealth. Our analysis delimits the conditions under which such loud and quiet equilibria exist. We draw managerial implications for luxury brands under both equilibria.

Keywords: Luxury Branding, Signaling Games, Emerging Markets, Marketing, Pricing