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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