TY  - JOUR
AU  - Bagwell,Laurie Simon
AU  - Bernheim,B. Douglas
TI  - Conspicuous Consumption, Pure Profits, and the Luxury Tax
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4163
PY  - 1996
Y2  - September 1996
UR  - http://www.nber.org/papers/w4163
L1  - http://www.nber.org/papers/w4163.pdf
N1  - Author contact info:
Laurie Bagwell
Kellogg Graduate School of Management
Finance Department
Northwestern University
Evanston, IL 60208

B. Douglas Bernheim
Department of Economics
Stanford University
Stanford, CA 94305-6072
Tel: 650/725-8732
Fax: 650/725-5702
E-Mail: bernheim@stanford.edu
AB  - 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.
ER  -