NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Conspicuous Consumption, Pure Profits, and the Luxury Tax

Laurie Simon Bagwell, B. Douglas Bernheim

NBER Working Paper No. 4163 (Also Reprint No. r2067)
Issued in September 1992
NBER Program(s):   PE

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.

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Document Object Identifier (DOI): 10.3386/w4163

Published: American Economic Review, vol. 86, no. 3, pp. 349-373, June 1996.

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