A Theory of Minimalist Luxury

Abstract

In this paper, we incorporate incomplete information about consumer wealth and the presence of high-quality, low-price counterfeits to investigate when a consumer may engage in minimalist, as opposed to excessive, luxury consumption to signal her wealth. Past literature has shown that when wealth is not observable, the wealthy are motivated to outspend the low-types to signal their wealth. We show, however, that when high-quality counterfeits exist and are visibly indistinguishable from the authentic products, excessive 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 mimickers, and hence, consuming fewer items can be more effective a signal for wealth. We derive this minimalist luxury equilibrium and explore managerial implications of the mechanism through which this equilibrium occurs.

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