"Secret? No, We Already Know Why We're Obsessed with Luxury Goods"

Photo Unsplash by freestocks

In the present world, where consumerism is prevalent, people are increasingly seeking to spend on luxury goods, and a report by J.P. Morgan shows that the luxury goods market has grown by seven per cent in the last year. Luxury goods are seen everywhere around us. When you are in a shopping mall you can see most people with an iPhone in their hand and a Chanel or Louis Vuitton bag on their back. This raises the question: how do luxury goods attract people to consume them? Why do people choose to consume luxury goods? These issues, while seemingly belonging to the study of psychology, can be explained by some of the theories of economics.

From an economic point of view, consumers are rational when making consumption choices, and luxury goods are usually considered to be high income-elastic, suggesting that demand for luxury goods should not have been strong in today's high cost of living. Therefore, the growth of the luxury goods market will not be that great in theory. However, consumers are not completely rational when making consumer decisions and they may be influenced by various factors to make biased decisions. One of these influences is known as the framing effect in behavioral economics and marketing uses this effect effectively.

Framing effect & Salience

When you browse Instagram or YouTube have you ever noticed the brands of the items these influencers use? Most of them are from luxury brands. Research has shown that the luxury goods industry mainly uses marketing through social platforms such as YouTube or Instagram to increase brand awareness (Ko et al., 2016).Moreover, studies have shown that after watching vlogs about luxury brands on YouTube, people realize that luxury goods give them a higher quality of life and symbolize a higher social status, which makes people perceive the value of luxury goods as higher and are more inclined to buy them (Lee & Watkins, 2016). Luxury goods often hold intangible benefits beyond their physical attributes. While economic theories suggest that demand for such goods should be limited, the reality is that consumers are driven by a mix of rational and emotional factors. The combination of status, quality, emotions, social influences, and effective marketing all contribute to the enduring appeal of luxury goods in our society. This phenomenon can be explained by framing and salience in behavioral economics. It's like a mental trick - luxury marketing frames these products as symbols of success, making us more likely to desire them. It's not just about the products themselves, but also about the wealth, status and prestige they represent. It is in this way that luxury marketing shapes our desire for luxury by showing us the benefits of buying brand-name goods.

Loss aversion

How would you act if everyone around you has the same style of clothes or items, but you don't? You will buy the items. What about if there is a trend right now? You will follow the trends. Humans are social animals. We all want to feel like we belong and care about our outward appearance or reputation. Thus, you don’t want to look left behind; you want to be recognized on the same or higher level. Purchasing premium assets is also the case. Because luxury goods are not only used as a tool but also to raise our social status. Just like we mentioned above. These kinds of additional value make us buy it despite the high costs. Examples include the symbolic, lasting value of items, and emotional satisfaction and happiness. To avoid the feeling of economic loss, we rely on luxury goods. This phenomenon is called ‘loss aversion’ from a microeconomic point of view. As a result, the luxury market can maintain stable demand even when economic conditions fluctuate.

Figure 1 Real GDP growth Resources: IMF report

According to a study conducted by the International Monetary Fund a.k.a IMF, it demonstrates that real GDP growth has slowed down over the last two years. Real GDP growth is one of the factors showing the economic recession. Meanwhile, a report issued by Bain & Company indicates that no matter how depressed the economy has been over the past two years (2021~2022), the amount of luxury consumption has 35% increased. This shows that luxury consumption is deeply linked to loss aversion.

Herd behavior

Another factor that influences people's willingness to buy luxury goods is herd behavior. Imagine when everyone around you is carrying a Chanel bag and wearing a Dior dress, would you desire these items as well? For example, in China, McKinsey's report charts that the number of Chinese luxury consumers has reached 7.5 million, and this number will continue to grow in the future (Bu et al., 2017).

Figure 2 Chinese luxury consumers Resources: McKinsey & Company

When the crowd of luxury consumers keeps expanding, the people around them will have the idea that "I should have a luxury product too", plus the image of high social status people created by the marketing of luxury products makes people even more afraid of losing the social status they have now because of the lack of luxury products so that they will be despised by other people, which is the loss aversion mentioned before. All these factors together stimulate the herd behavior and make people follow the trend of buying luxury goods (Pham et al., 2023).

Conclusion

So, as much research has shown, theories such as frame effect, salience, loss aversion, and herd behavior explain why we choose to wear more famous brands, even though they are the same product. In other words, buying luxury goods is not just "good" but deeply linked to how we perceive, feel loss, and judge value. All of this affects our shopping habits. Think about these points the next time you shop. Maybe you will have a new perspective on luxury goods!

Reference List

Bu, L. et al. (2017) Chinese luxury consumers: More global, more demanding, still spending, McKinsey & Company. Available at: https://www.mckinsey.com/capabilities/growth-marketing-and-sales/ourinsights/ chinese-luxury-consumers-more-global-more-demanding-still-spending (Accessed: 18 April 2024).

D’Arpizio, C. et al. (2024) Long live luxury: Converge to expand through turbulence, Bain. Available at: https://www.bain.com/insights/long-live-luxury-converge-toexpand- through-turbulence/ (Accessed: 19 April 2024). International Monetary Fund (2023). Real GDP Growth. [online] Imf.org. Available at: https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD

Ko, E., Phau, I. and Aiello, G. (2016) ‘Luxury brand strategies and customer experiences: Contributions to theory and Practice’, Journal of Business Research, 69(12), pp. 5749–5752. doi: 10.1016/j.jbusres.2016.04.170.

Kim, W. (2023). The surprising reason luxury goods are booming. [online] Vox. Available at: https://www.vox.com/money/23728283/luxury-designer-boom-nike-lvmh-pandemicle-creuset

Lee, J.E. and Watkins, B. (2016) ‘YouTube vloggers’ influence on consumer luxury brand perceptions and intentions’, Journal of Business Research, 69(12), pp. 5753–5760. doi:10.1016/j.jbusres.2016.04.171.

Luxury market outlook: J.P. Morgan Research (2023) Luxury market outlook | J.P. Morgan Research. Available at: https://www.jpmorgan.com/insights/globalresearch/retail/luxury-market (Accessed: 17 April 2024).

Pham, M. et al. (2023) ‘How does herd behavior impact the purchase intention? explore the moderating effect of risk aversion in the context of Vietnamese consumers’, Acta Psychologica, 241, p. 104096. doi:10.1016/j.actpsy.2023.104096

Voteconomics

Why do individuals vote when a single ballot seems unlikely to change an election's outcome? At first glance, the act of voting might appear as a drop in the vast ocean of democracy, an irrational gesture when weighed against the odds. Yet, voting remains the cornerstone of democratic societies, a testament to the collective power of individual choices. Through microeconomics, we reconsider what it means to cast a vote as we explore utility and behavioural economics.

Is voting even worth pursuing?

Voter Apathy is a real phenomenon, with many individuals globally echoing the sentiment “We don’t care who wins the election,” as expressed by an anonymous interviewee on CNBC (2020). This attitude aligns with the Paradox of Voting proposed by Downs (1957), who noted that the act of voting could seem irrational given the negligible probability of a single vote swaying electoral outcomes.

If your vote affects an election outcome only when it breaks a tie, then ideally, you should abstain from voting and realise the outcome, rather than voting and realising the same outcome. Instead of browsing general election manifestos or

before paying postage fees to vote, a higher utility can be gained from doing something enjoyable like watching a movie. In a rational choice framework, the utility of voting would often be outweighed by the costs, such as the time and effort to register and vote, especially given the minuscule probability of a single vote determining the outcome of an election.

Is voting even worth pursuing?

Even though the benefits of voting appear to be outweighed by the costs, behavioural economics steps in, shedding light on why individuals defy the odds and head to the polls.

The Paradox of Voting assumes that your vote increases your utility only when it plays a pivotal role in the election outcome. However, Riker and Ordeshook’s (1968) critique distinguish between utility that is derived from your vote when it is pivotal, and utility that is derived from your vote independent of the election outcome. A person could derive utility from voting for all sorts of reasons.

Some people gain satisfaction from exercising this fundamental right to support the democratic process even when the probability of their vote swaying the election is minuscule. Cognitive bias can make casting a ballot feel like a monumental gesture, perhaps more significant than it truly is. This would mean one derives utility simply from voting and not the outcome.

In addition to viewing voting as a fundamental right, there are notable psychological factors that contribute to people's engagement in this exercise.

The herding effect describes the tendency of individuals to imitate the voting behaviour of those around them. When your social circle is buzzing with election fever, the collective enthusiasm for voting can exert a subtle yet undeniable influence, nudging you to follow suit and participate in the democratic process. It is akin to finding yourself in a room where everyone is applauding a captivating performance - a gentle reminder that joining in can be both socially expected and personally rewarding.

This explains why voter turnout differs across groups or regions, as individuals are reluctant to go against the behavioural patterns in the group. For example, the diagram below shows the different proportion of voters by age group.

Similarly, this explains why voting blocs are common in certain communities or regions. Political scientists Laird and White (2024) concluded, voting for Democrats has been a behavioural norm in Black communities due to social pressure. Similarly, the “Red Wall” is a term used to describe traditional Labour-voting regions in the UK, as individuals are reluctant to go against the behavioural patterns within their community.

Rather than voting with the crowd, some people base their motivations on salience. It is the issue-centric approach behind choosing to vote, simplifying the complex decision-making process by spotlighting a policy or concern that deeply resonates with them.

But what if this pursuit of salience falls short, and one must choose between candidates that do not align with their key preferences? Loss aversion suggests that individuals tend to place greater weight on avoiding losses than on acquiring equivalent gains.

Suppose that we have 2 politicians; Bill and Phil:

• Bill is perceived by a voter as having policies detrimental to the community.
• Phil is seen as less favourable, but still raises some concerns.
• The voter experiences loss aversion, fearing the negative consequences of Bill winning.
• Despite reservations about Phil, the voter reluctantly votes for Phill to avoid the perceived losses associated with Bill winning.

In this context, people may be motivated to vote by the fear of Bill winning the election and implementing his detrimental policies. Hence leading them to vote solely driven by the loss aversion principle—an inclination to dodge undesirable outcomes at all costs.

Given these insights: What does it mean to cast a vote?

Voting is the act of expressing your preference in a democratic system, thus from a behavioural economic perspective, voting can be understood as an intricate decision-making process influenced by various cognitive biases, social factors, and incentives. By understanding these factors, we can better appreciate the significance of our individual choices.

Despite the Paradox of Voting raising the question of why you should bother voting at all; global voter turnout rates can range from 50% to over 80% (V-Dem, 2023), indicating that most people desire to vote. Although on the face of it, one vote may not directly change the outcome of an election, each ballot cumulatively contributes to the shaping of society’s future direction - just because you were not the first raindrop to flood the river, that does not mean you did not play a part in deepening its currents.

Alongside your vote, you could persuade three of your flatmates to vote for a particular politician in a general election. This is more effective than simply voting yourself, and it is certainly a more economical use of your time.

References

Clifford, C. (2020) ‘I don’t plan to vote ever again’: The psychology of why so many people don’t vote, even in 2020, CNBC. Available at: https://www.cnbc.com/2020/10/30/why-people-choose-not-to-vote.html

Downs, A. (1970) An economic theory of democracy : Downs, Anthony : Free download, borrow, and streaming, Internet Archive. Available at: https://archive.org/details/economictheoryof00down

Leonhardt, D. (2024) How peer pressure affects voting, The New York Times. Available at: https://www.nytimes.com/2024/03/22/briefing/2024-black-voting.html

Riker, W.H. and Ordeshook, P.C. (2014) A theory of the calculus of voting*: American Political Science Review, Cambridge Core. Available at: https://doi.org/10.2307/1953324.

The British Election Study (2021) Age and voting behaviour at the 2019 general election, Age and voting behaviour at the 2019 General Election. Available at: https://www.britishelectionstudy.com/bes-findings/age-and-voting-behaviour-at-the-2019-general-election/

V-Dem. (2023) Voter turnout, Our World in Data. Available at: https://ourworldindata.org/grapher/voter-turnout

Choice Architecture: Behavioural Economics as a Catalyst for Organ Donation

 

We are in the midst of an organ crisis. The government believes it can be eased through the use of a tool called Behavioural Economics. In this blog, we explore the issue and how a change in government policy can save lives.

How often do you think about your power to change lives? What if exercising that power was as simple as not saying ‘no’? In the UK’s opt-out organ donation system, your silence can speak volumes. Although many overlook organ donation, it holds immense power to save lives. In fact, 3 people die every day across the UK as a result of the organ shortage (NHS 2024). Behavioural Economics delves into how psychological, social, cognitive and emotional factors influence economic decisions, revealing why policies like the UK’s opt-out scheme can effectively boost donor rates. This post explores how applying these behavioural insights and subtle nudges in decision-making can significantly boost donor rates and save lives.

So, What is Behavioural Economics?

Traditional economic theories are hinged on consumers following rational models of behaviour. However, humans are imperfect and often act in ways that can't be explained through basic utility-maximising assumptions. Behavioural Economics explains these nuances in human preferences and deviations from rationality by recognising the influences of cognitive biases, emotions, social norms and other psychological factors.

To better understand this, let's delve into a few key concepts. When approaching a decision, consumers act from their unique reference point. This is tainted with biases as it is based on a range of information developed through past consumption experiences, our expectations, beliefs, associations, and stereotypes. Heuristics, similarly to biases, are irrational mental shortcuts used to simplify complex decision-making processes based on experience and belief instead of rationality. These alongside social considerations like social norms, fairness, altruism and each individual's morality, shape how humans approach decision-making. By acknowledging that humans don’t always act rationally we can aim to nudge consumers towards desired outcomes through something called Choice Architecture. Choice Architecture nudges decision-making without restricting choice in a variety of ways, such as:

Framing:

• It is important to recognise the influence framing can have on decision-making. How information is presented can greatly influence perceptions, judgements and decisions.
• For example, framing smoking negatively by saying 15% of smokers get lung cancer, as opposed to 85% of smokers living cancer free could lead to more desired outcomes for society.

Nudge Theory:

• This aims to make the desired choice the path of least resistance, thus nudging people to make the desired decision.
• Default options are an example of a nudge. Making organ donation the default, increases donation by reducing cognitive effort and taking advantage of our laziness.

Figure 2

Source: https://images.app.goo.gl/GaCdFz39kKJyZnYBA

The Power of Defaults in Organ Donation

As it stands, 7483 people are currently waiting for an organ transplant in the UK (NHS 2024). The first country in the UK to introduce an opt-out system was Wales in 2015 (Madden et al 2020). Following success in Wales, England decided to move to an opt-out system. This was also driven by the fact that 80% of people in England support organ donation but only 38% had opted in (GOV.UK, 2019). To bridge this disparity, an opt-out scheme could be the nudge needed to save lives by removing the obstacle of opting in. Behavioural insights could increase the number of organs available for transplants.

Implementing Choice Architecture in Organ Donation Policies

A large-scale trial by the NHS Blood and Transplant (NHSBT) department tested the effectiveness of different messages on the GOV.UK webpage encouraging organ donor registration. The best-performing message, which drew on ideas of reciprocity and fairness, led to 1,203 more registrations when compared to the control group during the trial period. This resulted in approximately 96,000 additional completed registrations over a 12-month period (GOV.UK 2024). Framing involved in the trial demonstrated that negatively framed messages highlighting the detrimental consequences of inaction, can be more effective than positively framed messages in preventing people from opting out.

However, Behavioural Economics does have its limitations...

Presuming consent from the general public, could raise ethical concerns. It could be argued to be an infringement upon individual agency and autonomy, especially as people may be unaware that they are opted into donation by default. Cultural and religious beliefs regarding the treatment of the body after death could discourage organ donation. In such cases, the automatic opt-in system or framing techniques may not be sufficient to overcome deeply held religious convictions. To address this, engaging with individuals, communities and religious leaders is crucial to fostering a dialogue about the compatibility of organ donation with their beliefs. By working together to find common ground and emphasising the life-saving potential of organ donation, the UK may be able to develop targeted interventions that respect religious beliefs while still encouraging organ donation registration. In addition, implementing an opt-out system where individuals are automatically registered as organ donors, can guide people towards a desired outcome without restricting their freedom of choices.

So, what have we learnt from all this?

The organ shortage crisis demands innovative solutions. Behavioural Economics provides a powerful toolset that leverages psychological insights to "nudge" people into organ donation. By shifting to an opt-out system, and using effectively framed messages, the UK has the potential to significantly reduce organ shortages.

However, a nuanced approach is crucial. Respecting religious beliefs and fostering open communication with individuals and communities is essential. While opt-out systems can be effective, they shouldn't come at the expense of individual agency. As we consider the organ shortage crisis through the lens of Behavioural Economics, it is essential to remember that behind every statistic is a person waiting for a chance of survival. How will you contribute to this life-saving mission? Could something as simple as doing nothing be the most altruistic decision you ever make? 

Bibliography

Applying Behavioural Insights to Organ Donation: preliminary results from a randomised controlled trial. (2024).

Department of Health and Social Care (2019). Opt-out organ donation: Max and Keira’s Bill passed into law. GOV.UK.

Every day across the UK someone dies waiting for an organ transplant. - NHS, (2020). ‘Organ Donation Law in England’, Organ Donation Law in England

Madden, S., Collett, D., Walton, P., Empson, K., Forsythe, J., Ingham, A., Morgan, K., Murphy, P., Neuberger, J. and Gardiner, D. (2020). The effect on consent rates for deceased organ donation in Wales after the introduction of an opt‐out system. Anaesthesia, 75(9), pp.1146–1152.

NHS, (2024). ‘Organ Donation and Transplantation - Activity Figures for the UK as at 12 April 2024’, https://www.organdonation.nhs.uk/helping-you-to-decide/about-organ-donation/statistics-about-organ-donation/

Choice Overload—Freedom or Paralysis?

Imagine ending an exhausting day by relaxing up with a movie. When you switch on your preferred streaming service, an overwhelming number of choices appear. Comedy, drama, action—where do you even begin? This kind of situation is all too typical in our modern lives, where an excess of options can cause paralysing indecision rather than increased freedom. Decision fatigue is a phenomenon that is more than just a small annoyance; it is a sign of a more serious economic problem that is affecting markets all over the world.

But how does the abundance of information at our disposal affect our purchasing patterns, financial choices, and general economic efficiency? With an ever-growing selection of goods, services, and digital content available, comprehending the dynamics at work helps guide us through the complexity of contemporary consumerism and point out potential solutions to improve decision-making.

Understanding Market Failures in the Digital Economy

In the past, economists such as Adam Smith discussed how self-interested people's activities could work as an "invisible hand" to guide open markets towards efficiency. But this hand tends to falter a lot in the digital world—not from a lack of effort, but from an abundance of information.

Have you ever been doubtful about the positive reviews below a trending product on Amazon? In my personal experience, it has often felt like navigating a minefield of inflated claims and suspiciously uniform reviews when choosing a device online. This is a classic example of information asymmetry, which is one of economics' most fascinating and effective tools. This happens when there is information that one party to a transaction has more of than the other, which may cause decisions to be made not for the purpose of maximising welfare.

Furthermore, there is a risk of decision fatigue due to the abundance of options, whether choosing what to watch or purchase. The paradox of choice, which states that the more options we have, the less satisfied we may be with our choice, if we make one at all, is another long-standing constant reminder from behavioural economists. This can be seen in an experiment wherein an extensive choice of jams was provided and it was found that, a larger variety of jams attracted more attention but resulted in fewer purchases: 30% of participants exposed to a smaller selection bought jam, compared to only 3% of those faced with a larger selection (Iyengar & Lepper, 2000).

Digital markets make this problem worse. With an infinite selection of goods and services at their fingertips, customers may quickly feel overloaded. Not only does this result in frustration, but it also raises the possibility of completely abandoning a transaction. Studies indicate that an abundance of options, as seen on streaming services or e-commerce websites, can cause decision fatigue in customers and result in less than ideal purchasing behaviour.

Tel Aviv, Israel-based cybersecurity firm CHEQ as well as the University of Baltimore have revealed that the spread of false information affects public perception and market trends, causing an annual cost of $78 billion. Misinformation further compounds the complexity. Social media reviews and AI algorithm bias have made it easier to manipulate people's choices, and mindless scrolling is costing us not just our freedom, but even our wallets.

Shaping a Fairer Digital Marketplace

How do we make sure our online marketplace is as clear-cut and uncomplicated as a nutrition label? Imagine a world in which the "ingredients"—that is, the algorithms—that determine what we see, purchase, or watch on the internet are made public by digital platforms. Could this openness change the way we interact with the internet?

In economics, efficient markets depend on transparency. Consumers can make more informed decisions when they are aware of the workings of the goods and services they use, much like what's listed on food labels. Customers' trust and satisfaction may significantly change if digital platforms reveal how algorithms affect the content they show us or the products they recommend. Would more information about these digital "recipes" enable users to make decisions that more closely suit their preferences?

Think about the advantages that might result from laws requiring companies like Netflix and Amazon to disclose their algorithmic processes in a clear and open manner. Consumers might be less confused and perhaps even irritated by recommendations for certain goods or television programs if they can comprehend why they are being made. In addition to preventing unfair product promotion and user behaviour manipulation, this transparency may also result in a more equitable digital environment.

Apart from this, by improving market efficiency and enabling us to navigate online environments more skillfully, integrating digital literacy into education could enable technology to work for us rather than against us.

We need to ask ourselves, "What steps can we take today to advocate for and implement such transparency?" as we take a closer look at these changes. It takes more than just improved business practices to ensure equitable and effective digital markets; we also need to create an atmosphere where technology empowers rather than limits our options.

Steering Toward a Brighter Digital Future

After examining the complexities of the digital economy, it is evident that although technology brings with it previously unseen possibilities, it also poses distinct difficulties. The digital age forces us to reconsider how markets function and are regulated, from the deluge of options to the dangers of disinformation.

In the digital age, economic efficiency is not merely a theoretical concept—it is essential. Not only are digital transparency, fair competition, and literacy necessary goals, but they are also possible actions that we must take to guarantee that our digital interactions are as productive and equitable as possible. Demanding more transparent information and supporting fair market practices will help create an atmosphere that encourages innovation without jeopardising the welfare of consumers.

References

● Hub, Iisd.S.K. (n.d.). Policy Brief: Towards a Code of Conduct to Ensure Inclusive Information Ecosystem | SDG Knowledge Hub | IISD. [online] Available at: https://sdg.iisd.org/commentary/policy-briefs/towards-a-code-of-conduct-to-en sure-inclusive-information-ecosystem/.

● Schwartz, B. (2004). The Paradox of Choice: Why More Is Less. London: Harper Collins.

● Iyengar, S. S., & Lepper, M. R. (2000). When choice is demotivating: Can one desire too much of a good thing? Journal of Personality and Social Psychology, 79(6), 995–1006. https://doi.org/10.1037/0022-3514.79.6.995

● Brown, E. (2019). Online fake news is costing us $78 billion globally each year. [online] ZDNet. Available at: https://www.zdnet.com/article/online-fake-news-costing-us-78-billion-globallyeach-year/.

● Digital economy rankings 2010 Beyond e-readiness A report from the Economist Intelligence Unit Written in co-operation with The IBM Institute for Business Value. (n.d.). Available at: http://graphics.eiu.com/upload/eiu_digital_economy_rankings_2010_final_web.pdf.

● Akerlof, G. A. (1970). "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism." Quarterly Journal of Economics.

The Spread of An Epidemic: The Stanley Cup

Phenomenon of the Stanley Cup

Is it a cup or a cult? Known for their distinguished large handles, eminent straws and their quenchable Tumbler sizes(Thompson, 2024), these Stanley cups bean to popularise in 2022 by health conscious ladies. According to The Guardian who often described it as an “adult skippy cup” or an “emotional support item”. It makes sense why you would fall victim to this infantilisation. This thirst for craze has spread world-wide which has caused impressionable consumers to camp outsides stores for a water tumbler that has gone viral on TikTok? Would you camp for this overpriced H20 flow state 1.2l tumbler costing a whopping 45 great British pounds?  Most would argue of course. But why is this you may ask? Why are consumers stampeding over this TikTok fuelled transformation of a reusable water bottle when potentially the next best thing is awaiting them elsewhere for a fraction of the price? Why are people falling into this Stanley trap? Whilst in theory, Stanley cups are better than throwing away single use plastic bottles, this glorification of micro trends are not sustainable. The Stanley cup can ideally represent an ongoing  symbol of consumerism. Sure, one Stanley cup will not have a devastating impact, but purchasing numerous Stanley cups because you have an obsessive need to have them in every single colour represents the biases consumerism patterns, we shouldn’t be frolicking it all over social media.

 

Figure 1: Bella Boye of Tampa, Fla., sat in line for three hours outside a Target to get the latest Stanley cup for her collection

Social Learning, Herding and irrational Behaviour.

Suddenly, you're intrigued. Is it the cool design or the practicality? Obviously, it's more than that. It's about being part of the crowd, following the herd, if you will. That's where behavioural economics and herd behaviour come into play. You see, it's not just about rational choices; it's about social influences. As more individuals hop onto Stanley cup bandwagon, demand shot through the roof. It's like a ripple effect – one cup purchase leads to another, and before you know it, everyone's clamouring for a piece of the action. So, what's the deal? Next time you're eyeing the latest trend, pause and think: are you genuinely into it, or are you just following the crowd? Are you purchasing the cup for the Stanley utility or for the social clout it possesses? If you follow the crowd, you therefore act as a prime example of social learning theory. It’s simply where we learn from each other in social settings like when your see your mate rocking up with this Stanley cup and you feel an impulsive urge to buy it. That’s social learning theory in action. Don’t be a slave to social learning theory. This cascading behaviour toward making irrational behaviour is only buying you into the Stanley club. Not the rational decision club.

 

Unveiling The Trend of Overconsumption and Biases in Decision Making  

So why do we buy it? Firstly, as consumers we must admit one thing. It's that our choices aren't always rational. While in theory we always want to maximize our utility. Our decisions and preferences ultimately change with the social surroundings and so on. It's usually not possible to predict such changes. Think about it, when you choose a water bottle, do you feel more comfortable with the Stanley because of its 110-year brand history(Jansen,2013) and reputation for ruggedness and durability? That's the "reference point" working. However, Stanley is a marketing master, using our consumer psychology and different strategies to make us fall into the biases in decision making. Oh, by the way, there is another mental phenomenon that should not be ignored. We believe that an expensive product is likely with high quality. Indeed, they were clever to use the anchoring effect. At first, people will certainly be hesitant because of Stanley cup price, but after a while the price starts to seem reasonable. Especially that these mugs are priced at £42.99 and £44.99, instead of rounded figures like £43 or £45, would give me the impression of being overly thrifty and getting the best deal surely.

 

Of course, many of you may also think like me. I will always use the Stanley cups because they are good quality. If I buy it again after that, I will also choose Stanley. Because I'm used to using it and I'm petrified of the quality will be bad if I choose another cup. God, Forbid I choose a different brand for my tumbler cup.  As in the NYT, Ms Wertner said that when you try to buy one you won't choose any other cup from any other brand. Besides, who doesn't like limited edition, co-branded Stanley Tumblr, and show it off? This shows what Loss Aversion is about. the fear of missing out on such a prized possession can override rational decision-making. The thought of not owning this limited-edition item becomes more salient than the potential benefits of choosing an alternative cup from another brand Whether it's on Instagram or TikTok, the Stanley is always in the hands of those hipsters. It is not only a bottle, but also a symbol of fashion and attitude. Stanley bottle combines durability, eco-friendly, health and fashion frequently appear around us. Owning it is like getting a ticket to the met gala, not only showing your taste, but also highlighting your care for health and the environment. Stanley has successfully emphasised the features of the product, by framing it in such a way to making it the preferred choice among consumers. It’s clear to show that the effect of framing the consumers choice is a prime example on the popularisation of the Stanley.

 

Stanley smart marketing technique trap

Its honestly just a stroke of genius. Amassing an abundance of awareness on social media platforms, people can’t seem to get enough of the cup. Their durable designs  and brand messaging aligns with customer value and deeply penetrates consumer conscious in building trust and loyalty.  As seen the Stanley cup is very clever with its marketing. Some would say psychological.  The psychological sweet spot called the endowment effect. According to CNN, this is where the longer you use something, the more valuable it becomes(Willingham, 2024). Even if the price increases as shown in figure 2, preferences remain unchanged. Being trendy is good; being timeless is better. In this case, Stanley cups have found the equilibrium in fuelling ongoing interest. It’s truly fascinating how they have leveraged social media. By consistently delivering quality and building on this Stanley image, Stanley can capitalise on the law of large numbers. The more exposure the Stanley gains; the larger audience to attracts resulting in a greater probability of turning these generic reusable cup users to devoted customers of the Stanley. By tapping into the endowment effect and leveraging the law of large numbers, Stanley cups continue to stand as an emblem of marketing success and its enduring legacy in the world of tumbler cups will remain unmatched.

 

Figure 2: Behavioural analysis graph of the endowment effect showing a market equilibrium shift in the Stanley Cup industry

References:

Baddeley, M. (2019). OpenMind. Available at: https://www.bbvaopenmind.com/en/articles/behavioral-economics-past-present-and-future/.

Demopoulos, A. (2024). Stanley cups took the world by storm. Then the backlash began. The Guardian. [online] 12 Jan. Available at: https://www.theguardian.com/lifeandstyle/2024/jan/12/stanley-cups-tumblers-water-bottle-trend.

Dornellas, C. (2024). Why Are Stanley Cups So Popular? Exploring the Phenomenon. [online] Rock Content. Available at: https://rockcontent.com/blog/why-are-stanley-cups-so-popular/#:~:text=The%20question%20 [Accessed 18 Apr. 2024]

Horton, V. (2024). Behavioural Economics: Collectibles and Sustainability. [online] Econ Every day for Everyone. Available at: https://econeveryday.com/behavioral-economics-collectibles-and-sustainability/.

Issawi, D. (2022). The Sisterhood of the Stanley Tumbler. The New York Times. [online] 17 May. Available at: https://www.nytimes.com/2022/05/17/style/stanley-tumbler.html.

Jansen, C. (2023). The Rise of the Stanley tumbler: How a 110-year-old Brand Achieved Viral Success. [online] Retail Dive. Available at: https://www.retaildive.com/news/stanley-quencher-tumblers-viral-success/699416/.

Hardcastle, K. (2024). Rethinking The Stanley Cup: The Decline of A Consumer Icon And The Continued Search For Affordable Joy. [online] Forbes. Available at: https://www.forbes.com/sites/katehardcastle/2024/03/03/rethinking-the-stanley-cup-the-decline-of-a-consumer-icon-and-the-continued-search-for-affordable-joy/.

Thompson, D. (2024). Why Did Stanley Water Bottles Suddenly Become a Cultural Phenomenon? [online] The Ringer. Available at: https://www.theringer.com/2024/1/26/24051178/stanley-cup-trend-social-media-how-did-they-get-so-popular.

What is behind the TikTok thirst for Stanley water cups? (2024). BBC News. [online] 17 Jan. Available at: https://www.bbc.co.uk/news/entertainment-arts-67999424

Willingham, A.J. (2024). Why people are so obsessed with those colorful Stanley cups. [online] CNN. Available at: https://edition.cnn.com/2024/01/10/style/stanley-cup-craze-explained-cec/index.html#:~:text=Lindsey%20also%20cites%20the%20endowment [Accessed 18 Apr. 2024].

Chilling together: Art of Fridge Sharing

 Introduction

In a shared accommodation, the refrigerator is one of the most frequently used appliances, and it is in a place where nourishment and socialising are usually intertwined with the roommates living together. However, according to User (2020), when it comes to the use of the fridge there are sometimes battles which can trigger disputes and disagreements between roommates (particularly when it comes to the distribution of space within it). To approach this issue, economic concepts such as allocation of resources, as well as alternative psychological factors including anchoring effects need to be taken into consideration. In this blog, we are going to discuss and offer some possible solutions on how to share a refrigerator fairly with roommates, providing a fresh perspective on this everyday challenge.

A six-layer fridge in a UoM dormitory

Common good

A fridge is a typical common-pool resource. In the accommodation, students don’t pay to occupy space in the fridge, meaning the fridge is non-excludable (no student can be excluded from using it). The total space in a fridge is limited, and the more space one student occupies, the less space available for everyone else. The fridge is therefore rivalrous and we could thus solve for the economically optimal option for students to share the fridge (Jaede, 2017).

Consider the output of occupying the space in the fridge is the satisfaction of students. Imagine one student has a normal requirement for space in the fridge to store food. When all necessary food that can enable the student to live in the most comfortable manner is stored (which infers the maximum satisfaction level), the space required is 2 layers of the fridge for instance. Referring to the graph below, when no space is

available to the student, his satisfaction level would be 0 (or even negative). When half of a layer (0.5 Layer) is assigned to the student, his satisfaction level would increase from 0 to S1. Similarly, when 1 layer, 1.5 layers and 2 layers are assigned to the student subsequently, we could expect to see the satisfaction level increase correspondingly. The student’s satisfaction is maximised when he is given 2 layers (even if there are additional spaces available) and buying more food is bound to be wasted which would lead to a degradation of the satisfaction level.

Ideally, a possible solution where the fridge is assigned to each of the students according to each of their maximum satisfaction levels could be obtained. In this case, a situation where everyone is happy could be achieved.

Behavioural Economics (Fairness)

In reality, not everyone’s maximum satisfaction level can be achieved in a shared fridge due to limited space and factors related to behavioural economics. Social norms, for example, could influence how much refrigerator space is allocated, how long goods can be kept, and whether goods (such as milk) are shared or not. Also, some students might value the collective welfare of their roommates over their individual satisfaction. This altruistic behaviour can influence their actions, like voluntarily cleaning it or sharing their food without expecting anything in return.

In addition, the original allocation of space in the fridge could bring about anchoring effects (Hoffman, 2024) which describe the phenomenon that people tend to make judgements based on the initial information provided (the “anchor”). In this case, it could be accepted as the standard fairness baseline when the space is originally assigned evenly. It may be argued that any change from this original distribution is unfair as the change could be against someone's benefit (Hoffman, 2024). Thus, one

possible solution to solve the conflict might be negotiation. Assume the requirement for the space of the fridge changes. For instance, someone’s dietary habits change, and they may need more space to store groceries. The refrigerator space may be redistributed since there is an increase in demand for storage room. Through effective negotiation, the revised assignment is probably going to be approved as long as it falls within the range of what is thought to be a reasonable modification.

Apart from that, someone may overestimate their self-control ability (Varian and W. W. Norton & Company, 2020), leading to more space required in the fridge than initially expected. For example, they are likely to purchase too much due to the discount when going grocery shopping. In this case, supervision and punishment for impulsive behaviour might be a helpful resolution.

Alternative Philosophical Perspectives

According to an article in the Journal of Research for Consumers, a communal refrigerator can be classified as a secondary territory which is one where students have some level of ownership over the space but to a diminished degree (Griffiths, 2015, p.8). The authors wrote that “regular users of secondary territories tend to exert some restriction” on the “frequency with which space is used and shared”, so naturally the students who use the fridge the most obtain some informal authority over how much space they can take up. This outcome favours a form of Laissez-faire economics (promoting free-market economics with minimal regulation), allowing the space to be naturally allocated without formal discussion. They also wrote that “courtesy and civility are the cornerstones of sharing public space” (Griffiths, 2015, p.13) and that people who don’t share are often seen as rude by others, meaning the pressure of social norms is enough to ensure that space is shared.

In conclusion, through applying microeconomic concepts, this blog presents some insights and suggestions on how to share a fridge in a relatively fair manner. Realising the refrigerator as a common good, assigning the space correspondent to each students’ maximum satisfaction level could be one ideal solution. However, situations in reality might be more complex. People are not always rational and may break the common agreement. Fridge conflict led by psychological factors related to behavioural economics is often dealt with negotiation, as well as supervision and punishment. In addition, under the philosophical perspectives, a form of Laissez-faire economics where natural allocation of the fridge space could be expected would emerge.

References:

User, S. (2020) How to share a fridge with roommates, Liberty Properties. Available at:

https://libertyproperties.info/more/blog/54-how-to-share-a-fridge-with-roommates (Accessed: 04 April 2024).

Griffiths, M., & Gilly, M. (2015). Sharing Space: Extending Belk's (2010)'Sharing'. Griffiths, MA, & Gilly, MC (2012). Sharing Space: Extending Belk’s (2010)“Sharing”. Journal of Research for Consumers, 22, 1-24.

Hoffman, B. (2024). The Anchoring Effect: What It Is And How To Overcome It. [online] Forbes. Available at: https://www.forbes.com/sites/brycehoffman/2024/02/24/anchoring-effect-what-it-is-and-how-to-overcome-it/ (Accessed 7 Apr. 2024) Jaede, M. (2017). The Concept of the Common Good (PSRP Working Paper 8). Global Justice Academy, University of Edinburgh.

Varian, H.R. and W. W. Norton & Company (2020). Intermediate microeconomics : with calculus. New York ; London: W. W. Norton & Company, Copyright.

FOMO is Real: The Economics Behind Black Friday

Black Friday is the biggest shopping event of the year, and projected spending for Black Friday 2023 is 8.74 billion GBP in the UK (P. Smith, 2023). Why do people still participate? Due to cognitive biases in behavioural economics affecting consumers’ decisions. Behavioral Economics studies economic theories psychologically (Angner and Loewenstein, 2007). Empirical evidence from behavioural economics shows consumers’ choices often deviate from economic assumptions (Frederiks, Stenner and Hobman, 2015).

So how exactly does behavioural economics inform our crazed shopping decisions during Black Friday? There are many powerful cognitive biases exhibited by consumers to explain the Black Friday phenomenon. Have you ever felt compelled just to buy something because if you did, then you would get another one for free? When retailers use the phrase “Buy One, Get One Free” during sale events, they are appealing to an effect in economics, known as the Zero Price Effect. When a product is advertised as free, then the customer places greater value on it (Shampanier et al, 2007). This is why consumers often act irrationally when presented with promotional deals during Black Friday because of the importance they place on ‘free’ products.

However, you will be sad to hear that you are yet again a victim of manipulative advertising campaigns. In many cases, retailers will actually increase the price of the item you are actually paying for (The Zen Agency, 2023). Therefore, you are not necessarily getting the second item for free because you have to pay the difference between the original price and the higher price in the face of the Black Friday deal. Retailers are smart and consumers, like you, motivated by materialism, are just their little puppets.

Retailers use the weapon of Black Friday to their advantage because they themselves are familiar with the bias that consumers display when making decisions. For example, they are familiar with loss aversion, in which consumers place greater importance on losses than gains (Gal & Rucker, 2018). In the context of Black Friday, consumers are more focused on the consequences of not partaking in these deals, rather than the benefits that they acquire from buying items during the sales. I, myself, have definitely fallen victim to this so do not fret! Black Friday is a dangerous mind game and I am positive that we have all once been a sucker for a deal!

Companies rely on a number of techniques, including psychological tactics designed to take advantage of consumer biases to achieve this result. The mad rush of Black Friday prepares the ground for this.

Have you ever noticed how they often advertise "limited-time offers," which stimulates the scarcity bias in the consumers? When customers notice that there is less time or less supply of a product, it plays a significant manipulative role in how they perceive the actual value of the product (Cialdini, 2021). For instance, doorbuster deals are promoted as being available only for a short duration or until stock is exhausted, hence, customers are pushed into making a hasty buying decision, lest they miss out on the opportunity.

Another trick is the anchoring effect where retailers place the "original price" near the discounted price to make a visual anchor, this makes the discounted price seem like a great offer by comparison (Kahneman, 2011). This capitalises on consumers' inclination to overweigh the first bit of information presented as the basis for the decision. It is a very sneaky tactic that makes you think you are getting a bargain, even though the original price might have been artificially inflated.

Companies use another social strategy during Black Friday called the bandwagon effect when they flaunt how many bought or viewing the products implying that there is a need (Aronson and Aronson, 2018). This strategy makes use of social proof heuristics, in which individuals use the actions of others as evidence that they are correct. Messages on online shopping sites such as "20 people have this in their cart right now" cause urgency which is similar to the atmosphere of a crowded store and everyone is grabbing something off the shelves. Such strategies boost sales because we have a tendency to follow the herd and believe that something must be right if everyone else is doing it.

So how can you make sure you will not be a victim of those companies’ deception? Fear not, I will give you some tips on how to be a wiser consumer!

First of all, set yourself a budget before divulging in the world of discounts. Yeah, it is a cliché but it is crucial in keeping your finances in check. Picture this, you click on those websites and suddenly you get a surge of wanting to buy everything, and you ask yourself, “what more can I buy?” and before you know it, you have overspent and regret kicks in. Trust me, been there, done that. Remember, your budget will not be the same as your friend’s. You need to know what you can or cannot afford before you start your shopping spree. So, force yourself to follow a personal budget before you spend it all in one place!

Secondly, Black Friday is an annual occurrence. You need to remind yourself that these kinds of promotions will come around again! It is a never ending sales carousel; Christmas sale, Boxing Day and many more. Focus on what matters to you and what you actually want. There is no need to pressure yourself into buying everything that has a discount. Now repeat after me, just because I WANT it does not mean I NEED it!

So next time Black Friday comes around, approach the phenomenon with hesitancy and think to yourself “Am I really getting a deal here?” or are you just another victim of a manipulative marketing strategy. Avoid social media at all costs and exercise a great deal of self-control. As someone who has forever been a victim to the appeal of Black Friday, trust me your bank account will be eternally grateful! Now go shop responsibly!

References

Angner, E. and Loewenstein, G. (2007). Behavioral Economics. [online] papers.ssrn.com. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=957148. Aronson, E. and Aronson, J. (2018) The Social Animal. New York: Worth Publishers, Macmillan Learning. Cialdini, R.B. (2021) Influence: The psychology of persuasion. New York: Harper Business, an imprint of HarperCollins Publishers.

Frederiks, E.R., Stenner, K. and Hobman, E.V. (2015). “Household energy use: Applying behavioural economics to understand consumer decision-making and behaviour.”, Renewable and Sustainable Energy Reviews, [online] 41(1364-0321), pp.1385–1394. doi:https://doi.org/10.1016/j.rser.2014.09.026.

Gal, D. & Rucker, D. (2018). “The Loss of Loss Aversion: Will It Loom Larger Than Its Gain?”, Journal of Consumer Psychology, 28(3), pp. 497-516.

Kahneman, D. (2011) Thinking fast and slow. U.K: Penguin Books. P. Smith (2023). Topic: Black Friday worldwide. [online] Statista. Available at: https://www.statista.com/topics/8714/black-friday-worldwide/#statisticChapter [Accessed 13 Apr. 2024].

Shampanier, K., Mazar, N. and Ariely, D. (2007). “Zero as a Special Price: The True Value of Free Products”, Marketing Science, 26(6), pp.742–757.

Thezenagency.com. (2023). Black Friday Consumer Behavior - The Psychology Behind the Madness. [online] Available at: https://www.thezenagency.com/latest/the-psychology-behind-black-friday-understanding-consumer-behavior/#:~:text=Loss%20aversion%20is%20another%20powerful [Accessed 17 Apr. 2024].

Manchester’s Beryl Scheme - Could it ‘Bee’ Better?

We commuters and students are all too familiar with the tedious journey from Fallowfield, down Wilmslow Road, past Lidl and finally on to our destination, be it work or university. But all hope might not be lost. In the bustling streets of Manchester, a new transport revolution has taken place. Could our unlikely saviour from the busy commute take the form of a simple yellow bike? Let us take a look at the hidden world of economics and how it can show us the benefits and drawbacks of the Beryl bike hire scheme.

Behavioural Economics and Economic Benefits

Generally, bike hire schemes are an example of ‘nudge’ economics, a way of incentivising people into behaving a certain way. Cycling is good for you, it has numerous health benefits, both physical and mental. Looking at the Barclays bike scheme in London implemented by Transport for London (TFL). “It (TFL) enabled behavioural change… taking the hassle out of cycling - buying a bike, maintenance, storage - and providing a compelling proposition for consumers” (McCormik, 2011). No longer did people need to worry about paying large up-front costs for a bike or worry about maintaining them. Nowadays, more people than ever cycle to work in London and has partly contributed (among other factors) to reduced congestion, demonstrating this change in behaviour that TFL wanted.

Turning our attention towards Manchester, In November 2021 Manchester City Council rolled out the Beryl bike hire scheme, one where people could hire pedal bikes for only 5 pence a minute. The scheme has become massively popular, with its bikes and e-bikes generating over 320,000 journeys across more than 800,000km (Beryl, 2023) since the scheme’s implementation. You may be thinking, how can hopping on a Bee bike impinge on the unfamiliar world of economics?

Choosing to cycle as your morning commute causes what we economists call a ‘positive externality’ - where the use of a good or service benefits a third party without them paying for it. By cycling on a Bee bike, you are paying Beryl for their service and they are providing it, in other words, a transaction between only two parties. However, more people benefit from this transaction than you might expect. By choosing to cycle instead of driving or taking the bus, you are inadvertently improving things for a third party, namely residents of Manchester.

Said residents are benefitting from the improved air quality and decreased noise pollution due to relatively fewer cars or buses on the road. According to industry calculations carried out by Beryl, the scheme has saved over 22 tonnes of carbon (Beryl 2023) and “Every year walking and cycling in GM saves: 48,000 tonnes of greenhouse gas emissions, 97,000 kg of NOx and 14,000 kg of particulates” (Sustrans 2021). Further, due to fewer people driving there is less congestion, meaning people can get to work quicker and use less petrol sitting in traffic.

So, what does this all mean? The hidden world of everyday economics has shown us that as you are cycling on your Bee bike, you are inadvertently making things better for people all around you without even realising it. Just think of all the happy Mancunians who are benefitting from your actions!

How Do We Address the Need for People to Act Responsibly?

The closer we look at the Beryl scheme, we can see more examples of economic scenarios at play, such that maybe we can explain a few of the issues with the bike scheme. Behavioural economics - the study of choices made by economic decision makers - helps to uncover a few of these issues.

Stemming from the field of behavioural economics, the ‘endowment effect’ is the tendency for individuals to value an item more when they own it rather than when they do not. Since people only ‘rent’ the bee bikes and do not outright own them, many of the bikes are discarded when people have finished their journeys, demonstrating that people care less about these bikes as they are not technically theirs. People may decide to cycle recklessly, potentially damaging parts of the bike. Numerous instances of vandalism and theft have also been reported in recent years.

Figure 1: Repair and Missing Bike Rate Changes. (Burnham,2023)

As a result, the scheme is experiencing teething problems and has led to a decrease in the availability of Bee bikes, such that the BBC estimated that “More than half the (Beryl) bikes in Manchester need repairs” (BBC, 2023) and that only 379 of the 943 bikes are in circulation around Salford, Trafford, and Manchester. Only 40% of the bikes are on the roads and is an example of what us economists call ‘the tragedy of the commons’; when people cannot be stopped from using the bikes which ‘uses up’ bike availability for other people. It is through people acting in their own self-interest, that the number of bikes in need of repairs has been increasing since March 2023. The issues that manifest due to this tragedy of commons are such that commuters and students are not being able to get to work and university due to the lack of bikes.

Bibliography and Wider Reading

BBC. “More than Half of Bikes in Greater Manchester Hire Scheme Need Repairs.” BBC News, 27

June 2023, www.bbc.co.uk/news/uk-england-manchester-66034291.

Beryl. “Success for Greater Manchester Bike Share Scheme | Beryl.” Beryl.cc, 2023, beryl.cc/news/2023/05/05/success-greater-manchester-bike-share-scheme.

Burnham, Andy. GMCA Overview and Scrutiny Committee. 2023.

McCormick, Andrew. “Behavioural Economics: When Push Comes to Nudge.” Www.campaignlive.co.uk, 11 May 2011, www.campaignlive.co.uk/article/behaviouraleconomics-when-push-comes-nudge/1070184.

Pidd, Helen, and Helen Pidd North of England editor. “Andy Burnham: Don’t Throw Manchester

Hire Bikes in the Canal.” The Guardian, 10 Nov. 2021, www.theguardian.com/uknews/2021/nov/10/andy-burnham-dont-throw-manchester-hire-bikes-in-the-canal.

Sustrans. Walking and Cycling Index 2021. 2022.

Ze, Zhang, et al. “Externalities of Dockless Bicycle-Sharing Systems: Implications for Green Recovery of the Transportation Sector.” Economic Analysis and Policy, Aug. 2022, https://doi.org/10.1016/j.eap.2022.08.009.

Back to survival mode: How the COVID-19 lockdowns affected consumer behaviour in China

 What is on your survival list?

Imagine that you are locked inside your home for months, what are the most important things that you need to keep you healthy, happy, and alive? Basic groceries would be essentials on your survival list. 

During the various lockdown periods in China, consumers were faced with an abundance of time at home, changes in social habits and new quarantine restrictions, which all had a great impact on the food market. Whilst grocery providers had to invent new strategies to cope with lockdown policies and to avoid losing a competitive edge in the market. 

In this blog post, we prepared findings and stories from both the demand side (i.e. consumers) and the supply side (i.e., grocery providers), to unveil the economic logic behind the scenes.

The Demand Side: Shifts in consumption behaviours

Based on heightened concerns about food safety, consumers engaged in panic buying behaviour during the pandemic, resulting in short-term stock-outs of certain key commodities (e.g., pasta, rice, canned goods, etc.) (Jill E. Hobbs, 2020). With the closure of the food service industry, there has been a significant increase in home meal preparation and consumption (Jill E. Hobbs, 2020). In addition, after the outbreak, with the concern of food safety, consumers were willing to pay an average premium of 18.14 yuan for fresh food reserves, which accounted for 60.47% of the fresh product reserve price.

We discovered that the preference of consuming sustainable food varies with age, gender and income level. Specifically, during lockdown, females were 1.517 times more likely to increase purchase of food with sustainable attributes than males when compared to the situation before the lockdown (Shanshan Li et al., 2021). Olivas, Bernabéu and Ureña suggest that this was because of the presence of social pressure for women to maintain their bodies than men. Shanshan also demonstrates that people aged 40–59 years were more likely to purchase more food with sustainable attributes than those aged 18–39 years. It is in line with a study which showed that Chinese consumers aged more than 36 were more likely to buy certified organic food (McCarthy et al., 2014).

In this situation, consumers are exhibiting price inelastic demand, where the demand for certain food items does not decrease significantly even if food prices increase. These findings also play into behavioural economics, namely, the psychological aspects of how people make decisions. In specific circumstances, the rational choice model does not systematically and correctly predict behaviour. When consumers put a high premium on certain goods, the specific effect is called salience, that is, the perceived importance of a good or a service.

The Supply Side: Impacts on food market dynamics

The series of changes have impacted the dynamics of the food market in China strongly and forced food supply chains to quickly adjust to cope with sudden changes in consumption patterns (Erpeng Wang et al., 2020), including re-evaluating marketing strategies, product offerings and distribution services.

The obstacles and delayed response faced by the supply side, such as labour shortages and transport disruptions, seriously affect the efficiency of food supply chains, causing price volatility and supply instability, consequently altering the equilibrium in food markets. To address these challenges, retailers may ration resources by raising prices, changing transport routes, or using local suppliers to reduce reliance on transnational supply chains. Meanwhile, the market, known as ‘the invisible hand’, seeks to rebalance demand and supply accordingly. In the end, everyone works together to cope with short-term supply uncertainty and long-term changes in market demand.

The General Equilibrium Theory applies here. Below is a graph showing the change in equilibrium, a consequence of changes in demand and supply.

When an external shock happens to the demand side, the demand curve shifts upward, and the supply curve does not move. The equilibrium point moves along the supply curve to the new price and quantity level.

The story of Freshippo

Freshippo, a subsidiary of Alibaba focusing on grocery delivery has positioned itself as a leader in meeting new consumer needs, with its innovative strategies, technology adoption and online offline integration.

However, Freshippo still struggled to meet demand for the most part. According to one of the authors’ friends who experienced a 70-day lockdown in Shanghai starting in March 2022, residents were waking up as early as 5am to get delivery slots from online grocers but found they sold out in seconds. This happened in a city where 25 millions of its residents were in lockdown.

Sudden shocks in demand resulted in higher price in equilibrium and demand not being met on time. But in the long run, with improvements in infrastructure and supply chain management, we find supply gradually climbing up and catching up to demand.

So what next...?

To conclude, the COVID-19 pandemic caused vast changes in China’s food market, shifting both consumer behaviour and market dynamics. If you happen to be in the food service industry, here are some tips for you for future reference.

First, consumers prefer to prepare meals at home, which results in online grocery delivery services expanded significantly during the pandemic, and this trend is expected to continue after the pandemic is over (Jill E. Hobbs, 2020). Additionally, demand for local food is expected to grow as consumer confidence in food safety and supply chain reliability may be affected. Second, consumers' high willingness to pay a premium for fresh food also suggests that food producers and retailers can earn higher profits by providing high-quality food that meets consumers’ expectations (Erpeng Wang et al., 2020). Meanwhile, this also calls for improved supply chain strategies, in order to effectively manage and distribute foods to ensure the freshness and quality. Businesses ought to remain wary of potential shocks to their model, using technology and innovation to adapt to the evolving needs of consumers.

Reference

Reuters (2022) 'Alibaba's Freshippo adds more couriers, still unable to meet Shanghai demand', Reuters, 24 April. Available at: https://www.reuters.com/business/retail-consumer/alibabas-freshippo-adds-more-couriers-still-unable-meet-shanghai-demand-2022-04-24/ (Accessed: 14 April 2024).

Shanshan Li et al. (2021) ‘Did the COVID-19 lockdown affect consumers’ sustainable behaviour in food purchasing and consumption in China?’, Food Control, 15 Jan. Available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9716012/ (Accessed: 14 April 2024).

Erpeng W. (2020) ‘Consumer food stockpiling behaviour and willingness to pay for food reserves in COVID-19’, Food Security, 6 August.

Hobbs, J.E. (2020). 'Food supply chains during the COVID-19 pandemic', Canadian Journal of Agricultural Economics, volume(issue), pp. 171-176. Available at: https://onlinelibrary.wiley.com/doi/epdf/10.1111/cjag.12237 (Accessed: 14 April 2024).

The intuition of conspicuous consumption

(Danziger, 2024)

Ever wanted to own a Gucci belt or arrive somewhere in an Aston Martin just to impress your friends, followers and strangers without understanding why? In today's blog post, we're exploring the realm of conspicuous consumption - buying things to flex your wealth and status. Conspicuous consumption is like the fashion show for our wallets. It's when we buy items not because we need them, but because we want to show off our social standing to impress others.

Conspicuous consumption refers to the lavish spending on goods and services primarily to display wealth and status. First theorized by economist Thorstein Veblen in the 19th century, this concept highlights the social signalling aspect of consumption. The Veblen effect proposes that the demand for certain luxury goods increases as their prices rise, contrary to the law of demand which underpins most microeconomic theory. This happens because the perceived value of luxury goods is tied to their price tag and explains why consumers may opt to buy a Rolex rather than a Casio watch simply to signal status despite similar functional purposes. The difference here is wealth signalling which is part of the functionality and potential utility of the good. Wealth signalling is similar to price signalling which describes how the price of a good indicates the level of demand for a good and the supposed quality. In a consumer-driven society, luxury items are priced higher than their mass-market counterparts, making them more exclusive. This exclusivity communicates affluence, as substantial wealth is required to purchase such expensive items. In essence, people desire these goods because they are expensive. This aligns with social comparison theory, which suggests that individuals evaluate their own wealth and status relative to others. By flaunting luxury possessions, individuals seek to outshine their peers and ascend the social hierarchy. This competitive aspect of consumption drives emulation, where people aspire to mimic the lifestyles of those they perceive as affluent.

Have you ever noticed some brands become hot overnight? This is where the network externality comes into play – the idea that the more people use something, the more utility the user gains. When numerous people buy the same luxury items, it would create a kind of social buzz which involves everybody in it. For example, every time when some high-end brands like Gucci publish new releases or limited-edition items, they want to create a consumer fanaticism. As more people purchase and show the luxury items on social media, it creates a ripple effect. Suddenly, everyone wants to be part of the trend, the desire to own luxury intensifies. This huge demand further consolidates the pricing signalling effect of wealth and prestige. As more people get involved, the more prestigious and wealthier they become in the eyes of others. Network externality and conspicuous consumption together creates a vicious cycle, which fuel the popularity of these items.

The modern obsession with ‘luxury’ goods leads to inefficient resource allocation, overproduction and underinvestment in essential goods and services due to consumers prioritizing luxury consumption. People end up spending on items they don't need, while other important stuff gets overlooked. The acceleration of its demand is therefore detrimental to the economy. However, it can also be argued that conspicuous consumption can be valuable to the economy since its demand increases its market, in effect increasing the availability of investment and job creation. The magnitude of profits is paid to the investors, entrepreneurs, and employees and all three are key economic players. Although, conversely conspicuous consumption increases income inequality, as expenditure towards luxurious items means that the allocation of resources could be fairer.

Conspicuous consumption is a behavioural economic concept meaning it looks psychologically as to why humans demand certain items. It is underpinned by three key behavioural concepts known as framing, salience, and anchoring. Framing describes how luxurious items act as a pricing point for individuals to make a choice as to whether they’d like to conspicuously spend given their current economic circumstance. Salience relates to framing, since individuals indulging in such consumption like to observe the value of a brand or a badge/logo before deciding how important it is for them to make such a purchase. Anchoring can be related to salience and framing too, since small features such as a certain brand or the ability of a wealthy individual to buy something that is £2000 instead of £1800 because it’s “only a £200 difference” could be a mental rule made since they are spending a large amount on an item so £200 doesn’t seem like an impactful difference. These three aforementioned behavioural economic actions contribute to the acceleration of conspicuous consumption altogether.

More broadly conspicuous consumption generates externalities that extend beyond the individual purchaser. While the direct benefits of luxury spending accrue to the buyer in the form of status enhancement and hedonic pleasure, the broader societal implications are more nuanced. Conspicuous consumption fuels economic growth by stimulating demand for luxury goods whilst also exacerbating income inequality and perpetrating unsustainable consumption patterns, leading to environmental degradation and social stratification.

In order to avoid the trap of conspicuous consumption, we should cultivate awareness of the underlying motives behind it. Individuals can resist societal pressures to engage in excessive spending by emphasizing intrinsic values such as personal fulfilment, relationships, and community engagement. Additionally, governments and regulatory bodies can implement policies to mitigate the negative externalities associated with conspicuous consumption. This may include taxation on luxury goods, restrictions on advertising that promotes excessive consumption, and incentives for sustainable and socially responsible consumption practices.

In conclusion, conspicuous consumption exemplifies the intersection of economics, psychology, and sociology in shaping consumer behaviour and societal norms. While it serves as a potent driver of economic activity and social distinction, its unchecked proliferation poses challenges related to inequality, resource depletion, and social cohesion. By critically examining the motives behind conspicuous consumption and exploring alternative modes of value creation and expression, we can foster a more equitable and sustainable approach to consumption in the 21st century.

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