Perspectives on Status Consumption

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Title: Perspectives on Status Consumption
Physical Description: Book
Language: English
Creator: English, Alexander
Publisher: New College of Florida
Place of Publication: Sarasota, Fla.
Creation Date: 2009
Publication Date: 2009


Subjects / Keywords: Conspicuous Consumption
Luxury Goods
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theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
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Electronic Thesis or Dissertation


Abstract: This thesis aims to identify some of the methods by which consumption of luxury goods and therefore status can be analyzed. Lancaster's Attribute Analysis is employed to posit status as a characteristic of luxury goods and one that is desirable to consumers. Then, status can be thought of as a "good" and one that may be subject to a well-behaved preference structure, such as a Cobb-Douglas. Those who have a Cobb-Douglas utility function may consider status a critical good in everyday consumption, and for which there is no substitute for status. In addition, taste for and perception of status may be a function of several complex variables. Leibenstein's Veblen Effect is also investigated in order to show that real price and conspicuous price may differ and thus consumers may seek status through deals or discounts. Despite the fact that consumption of status is widespread across demographics, in an economic recession, the status market (overlapping with the luxury-goods market) may be uniquely affected and/or particularly hard-hit.
Statement of Responsibility: by Alexander English
Thesis: Thesis (B.A.) -- New College of Florida, 2009
Bibliography: Includes bibliographical references.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The New College of Florida, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Local: Faculty Sponsor: Coe, Richard

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Source Institution: New College of Florida
Holding Location: New College of Florida
Rights Management: Applicable rights reserved.
Classification: local - S.T. 2009 E5
System ID: NCFE004084:00001

Permanent Link:

Material Information

Title: Perspectives on Status Consumption
Physical Description: Book
Language: English
Creator: English, Alexander
Publisher: New College of Florida
Place of Publication: Sarasota, Fla.
Creation Date: 2009
Publication Date: 2009


Subjects / Keywords: Conspicuous Consumption
Luxury Goods
Genre: bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation


Abstract: This thesis aims to identify some of the methods by which consumption of luxury goods and therefore status can be analyzed. Lancaster's Attribute Analysis is employed to posit status as a characteristic of luxury goods and one that is desirable to consumers. Then, status can be thought of as a "good" and one that may be subject to a well-behaved preference structure, such as a Cobb-Douglas. Those who have a Cobb-Douglas utility function may consider status a critical good in everyday consumption, and for which there is no substitute for status. In addition, taste for and perception of status may be a function of several complex variables. Leibenstein's Veblen Effect is also investigated in order to show that real price and conspicuous price may differ and thus consumers may seek status through deals or discounts. Despite the fact that consumption of status is widespread across demographics, in an economic recession, the status market (overlapping with the luxury-goods market) may be uniquely affected and/or particularly hard-hit.
Statement of Responsibility: by Alexander English
Thesis: Thesis (B.A.) -- New College of Florida, 2009
Bibliography: Includes bibliographical references.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The New College of Florida, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Local: Faculty Sponsor: Coe, Richard

Record Information

Source Institution: New College of Florida
Holding Location: New College of Florida
Rights Management: Applicable rights reserved.
Classification: local - S.T. 2009 E5
System ID: NCFE004084:00001

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PERSPECTIVES ON STATUS CONSUMPTION BY ALEXANDER ENGLISH A THESIS Submitted to the Division of Social Sciences New College of Florida in partial fulfillment of the requirements for the degree Bachelor of Arts Under the sponsorship of Dr. Richard Coe Sarasota, Florida May, 2009


Acknowledgements I would like to acknowledge fi rst the unwavering love and support of my parents, Michael and Jane, and my brother Chris. My immediate family is always the principal resource for advice and encouragement and for that I am thankful. Also, my friend Blair, who despite many of her own acad emic challenges, has always been a voice of comfort and support. In addition, the assistance and friendly face of Professor Catherine Elliott was undoubtedly an integral part of my expe rience and I thank her for her participation. Further, I would like to acknowle dge my own efforts in this process. Had I never made it to New College, I would likely have graduate d from another institution without having completed a senior thesis project and been perfectly satisfie d. However, being here, I was forced to complete a thesis and although it wa s tenuous at times, I certainly feel that I have matured as an academic, even if I rarely think of myself as one. I hope that this experience prepares me for the excellence in my career of choice that will be necessary in order to prosper and achieve greater goals. Finally, I would like to say, I will miss many of the Sarasota institutions that provided me the venue for critical thought (Sarasota News and Books) and the ability to stress -relieve after a hard day (the Broadway Promenade 2nd-floor gym). ii


Table of Contents Status Consumption: What is It? 1 Chapter 1 Conspicuous Consumption I. Introduction 7 II. Thorstein Veblen 9 III. Harvey Leibenstein 11 IV. James Duesenberry 15 V. Milton Friedman 16 VI. John Galbraith 18 VII. Kelvin Lancaster 20 VIII. Others 21 Figure 1-1 27 Figure 1-2 28 Figure 1-3 29 Chapter 2 Luxury Goods and Lancasters Attribute Anaylsis I. Lancasters Three Assumptions 30 II. Product Rays in Attribute Space 32 III. Changes in Perceptions vs. Changes in Tastes 35 IV. Attributes in Luxury Goods 37 V. Status in Luxury Goods 39 VI. Dual Choices 41 VII. What is Really Being Purchased? 43 Figure 2-1 46 Figure 2-2 47 Figure 2-3 48 Chapter 3 Neoclassical Methods Section 1 Perspectives I. Intro 49 II. Cobb-Douglas Preferences for Status 50 III. Factors of Status 53 IV. The Evidence 57 Section 2 Real Price and Conspicuous Price in Practice I. The Veblen Effect Revisited 60 II. Points off the Dv curve 62 iii


Section 3 Cost-of-time Analysis of Deal-seeking Behavior 67 Figure 3-1 73 Figure 3-2 74 Chapter 4 The Market Section 1 Pre-Recession I. Recent Situation 75 II. Market Theme 78 III. Cultural Consequence 82 IV. Demand-side Factors 83 Section 2 Post-Recession I. Implications 85 II. Daslu 89 III. If We Assume C-D Preferences... 91 IV. Other Changes 93 V. Luxury Brand Changes 97 VI. Overall Market Changes 100 Conclusion I. Thoughts 103 II. Future Research 108 Bibliography 111 iv


v PERSPECTIVES ON STATUS CONSUMPTION Alexander English New College of Florida, 2009 ABSTRACT This thesis aims to identify some of the methods by which consumption of luxury goods and therefore status can be analyzed. Lancaster's Attribute Anal ysis is employed to posit status as a characteristic of luxury goods and one that is desirable to consumers. Then, status can be thought of as a "good" a nd one that may be subject to a well-behaved preference structure, such as a Cobb-Dougl as. Those who have a Cobb-Douglas utility function may consider status a critical good in everyday consumption, and for which there is no substitute for status. In addition, taste for and perception of status may be a function of several complex variables. Leibenstei n's Veblen Effect is also investigated in order to show that real pri ce and conspicuous price may di ffer and thus consumers may seek status through deals or discounts. Despite the fact that consumption of status is widespread across demographics, in an economic recession, the status market (overlapping with the luxury-goods market) ma y be uniquely affected and/or particularly hard-hit. Dr. Richard Coe Social Sciences Division


Status Consumption: What is It? The word status and its various derivatives1 are used in social science disciplines to describe the case where an individual ha s set him or herself apart from the masses, through one or more modes of differentiation: wealth, education, athletic achievement, lineage, name a few. Dictiona provides the following definition for status: "The position of an individual in relation to another or others, especially in regard to social or professional standing." In economics, there is a very dynamic subs et of consumer theory which addresses consumption that is status-motivated. Eastma n, et. al. (1999) define status consumption as "the motivational process by which individu als strive to improve their social standing through the conspicuous consumption of consumer products that confer and symbolize status both for the individual and surrounding si gnificant others" (p. 42). Similarly, Frost and O'Cass (2002) define status consumption as "the process of gaining status or social prestige from the acquisition and consumption of goods that the indivi dual and significant others perceive to be high in status" (p. 68). In most cases, the phrases "status consumption" and "conspicuous consumption" are used interchangeably in the literature, as conspicuous consumption is often used as a means to secure status, assuming the commodities consumed conspicuously are also status-bearing (p. 69). Often, the commodities used to convey status are luxury fashion goods, because they are visible and can be easily identified. They may be preferred over luxury services (p. 69), as services are less vi sible to significant others and may not as readily display 1 Synonyms for status include cachet, distinction and prestige. 1


status. That isn't to say that luxury serv ices are unpopular, but fo r the goal of gaining social status distinction, they may be less important or useful.2 In any case, as Chao and Schor (1998) mention, "social visibility is a key dimension of status consumption" (p. 111) Naturally, if no one can see the good or service in question, then the status cannot be bestowed upon the purchaser by the relevant significant others. Further, the wide dissemi nation of branded, logo-laden luxury fashion goods, which are highly visible a nd recognizable, might be an even better indicator of the importance of visibility in the process of status consumption as well as the fervent appetite for such status-bearing products. Sa tisfaction is derived fr om audience reaction not to the positive attributes of the good in question but to the wealth displayed by the purchaser in securing the product for consum ption (Eastman 1999, p. 43). This assertion assumes that the audience has accurate market knowledge or enough such that the price paid by the consumer is readily known or can be assumed by others to be appreciably high. In the case of luxury goods, the price may not always be conspicuous. Certain brands may be more easily identified as "pri cey" than others, depending on the display of logos or unique designs. In urban or suburban areas, stat us consumption may happen more often (Chao 1998, p. 124) and relevant others may have a better idea of the general price point of a good. Elsewhere, especially in rural areas where there may be less status consumption, price knowledge may be more sketchy and logo-bearing products may affect fewer assumptions about status or other qualities by si gnificant others. 2 Many visible luxury services may be used to gain status, especially bodily-pampering procedures which are visible for a period after purcha se. Such services include manicure and pedicure services, artificial tanning procedures and cosmetic surgeries or injections used to "turn back the clock." This would be an excellent topic for a future paper. 2


Even in areas of relatively high market knowledge, where status can be easily attained through the purchase of well-known luxury brand pr oducts, the ability to find luxury goods at a discount is relatively high.3 This increases the likelihood of a greater disparity between price paid (real price4) and conspicuous price, a concept that is often overlooked in the literature regarding c onspicuous and status consumption. I will investigate that matter in a later section of this paper, looking more closely at Leibenstein's Veblen Effect analysis and pr esentation. In addition to pricing and market knowledge, branding is another cr itical ingredient to the status-consumption mixture. Often, producers who market high-end l uxury goods to status-conscious buyers and consumers can effectively signal status via conspicuous consumption because of branding (Frost 2002, p. 69). Shipman (2004) defi nes branding as the creation of an image that adds informational or impressionis tic content to the produc ts it is applied to (p. 283). Luxury goods and the brands that market them seem to perpetuate images that revolve around uniqueness, prestig e and quality, which have b een shown to be principal motives for status consumption (Johnson 1999, p. 3). Well-known luxury brands include: Louis Vuitton, Gucci, Prada, Herms, Rolex, Cartier, Chanel, Este Lauder and many others. Dubois (1995) points out that "all of the products sold under [one] brand name share a symbolic identity and a core value ex pressing the 'quintessenc e' of that brand" (p. 71). All products from key chains, to cosm etics and wallets, to luggage, convey a common image that is determined by thei r brand name. In many cases, the use of 3 This will only be true assuming consumers have knowledge of all available providers of luxury goods which include such bargain-friendly internet-based stores as as well as access to physical outlet shopping malls. 4 One should be careful not to confuse real pr ice of purchase with real price of production 3


conspicuous branding via trademarked logos or symbols further aids in the recognition of a high-end luxury brand. Louis Vuitton has tr ademarked its classic intertwined L and V initials, which are seen on many of its produc ts. Chanel has an interlocking C's logo; Prada products carry a triangular metal and en amel plaque which bears the Prada name. Rolex has used a small crown symbol to si gnify the brand and its prestigious placement on the spectrum of timekeeping device s since the company's founding in 1905. Alternatively, Langer (1997) said that brands create value for the consumer through potential benefits of recognition of significant others, create positive feelings, and aid self-expression, coupled with an overall feeling of having personal "good taste" in brand choice (Frost 2002, p. 69). A compelling phenomenon which builds almost entirely off of brand recognition from trademarked symbols is the sale of c ounterfeit fashion merchandise bearing the logo or a close variant of a famous luxury brand. Usually these goods ar e produced at minimal cost and generally are of poor quality and sold at very affordable prices. This market has tightened somewhat in the last several years, owing to harsher laws against producers and buyers and the risk of civil action by the various fashion brands. At its height, the production, sales an d use of "knockoff" luxury goods reached every city in the world and many Americans purchased coun terfeit items, whether from street vendors in New York or from purse-p arties thrown by friends in their suburban homes. Most either know their purchase is fake and attempt to pass it off as real, or are completely unaware of the origins of thei r bag and either don't care or are embarrassed when they find out the truth. Regardless, the logo-laden product, whether real or fake, clearly has a significant ability to convey status or be pe rceived to convey status, as 4


evidenced by the popularity of knockoff goods, especially those bearing popular fashion brand logos. LVMH, the parent company of Louis Vuitton, has spent millions of dollars actively preventing sales of counterfeit L-V ha ndbags and pursuing so me of the largest distributors through the appropriate international legal ch annels. Counterfeit fashion goods are a fascinating area of consumer beha vior however they are not the principal focus of this paper and so they will not be discussed further. Not considering counterfeits and ignori ng differences in images of brands, Shipman (2004) posits that an authentically branded product may promise lower variation in quality even if it is no better in average qua lity, so that the price premium serves as an insurance against the risk of surprise irregul arities or faults (p. 283). This, free of imagerelated differences, could account for some of the consumer behavior that favors branded products over non-branded ones. In any case, the consumption of luxury brand goods for status reasons is an important and ever-expanding area of study in the field of economics. From the beginning of the last half-century, there has been extensive literature examining conspicuous consumption, status consump tion and how they're linked. In addition, theorists have found ways to tie interpersonal preference influence with consumers' desire for characteristics other than functional utility and how culture and a dvertising play into those preferences. In this paper, I hope to outline some of the most notable contributors to body of research on the matter, as well as hi ghlight some of the theories that I think are most relevant to understanding status c onsumption. Chapter 1 is an overview of those theorists. 5


Chapter 2 takes a more in-depth look at Lancaster's Attribute Analysis theory, which allows goods to be subdivided into "att ributes" which then provide utility. I posit that status is one of the attributes in l uxury brand products. In Chapter 3, I propose that for many, the demand for "status" may be base d in well-behaved preferences, in some cases even Cobb-Douglas pref erences, which imply that a consumer has a stable preference for status as a constant proportion of income. Also in Chapter 3, Leibenstein's Veblen Effect graph is examined in referen ce to real market situations, and concludes with a brief analysis of deal-seeking behavior using a simple cost-of-time concept. Chapter 4 includes some assertions about the future of the luxury goods market, based on the changing worldwide economic climate. Using these selected theories and my own assertions about the luxury market; I will defend my thesis statement: Status-motivated consumption is more widespread that many may think and status (as an attribute) is present in luxury fashion products. Further, because it is so widespread across income levels and other factors, many consumers may treat status as a normal good, meaning it can be studied from neocla ssical perspectives. Further still, status consumption, although complex is no longer anomalous. With the help of Lancaster's Attribute Analysis, one can better unde rstand an ever-widening area of consumer expenditure and potentially bette r-predict market changes in response to something like an economic recession. 6


Chapter 1: Conspicuous Consumption I. Introduction Throughout the world, the sh ift has been dramatic, as luxury goods have popped up all over the place (Vickers 2003, p. 459). Not only do wealthy entrepreneurs, capitalist heads of business, and the working upper-m iddle class purchase expensive goods and services, but wealthy music ar tists, famous celebrities a nd lower-income individuals buy them too. Premium-priced designer-fashi on commodities are one of the quickest and most direct ways to convey a message to others, commonly called signaling,5 that the bearer of the items is wealthy or possesses status. This might be because many of the expensive fashion items bear logos or copyright ed designs that are ti ed to a specific cost, a conspicuous cost to the wearer that most people in the modern world are aware of and can identify. In most cases, the idea is that the good or combination of goods earns them the status or social desirability which commonly come with wea lth, which is appealing as a social goal (Coelho 1993, p. 596), to a great num ber of people. A lot of those people are individuals who may not have b een able to afford such thin gs in the past, or who have only recently felt the appeal of the designer ba g or wallet. These are people who read in magazines about a hot item, or see their gi rlfriend with a new designer item from the local upscale department store, and think to themselves, "why can't I have that?" or "I can't be left out of the loop!" The cycle is vicious and never-ending.6 Keeping up with fashion includes staying primed for the latest trends through magazi ne subscriptions or online browsing, going out 5 Coelho 1993, p. 596 6 Simply browse two issues with a year of separatio n of a popular fashion magazine and you will see the physical manifestations of "on-trend" change regularly. 7


and purchasing fashion items which may or may not be within the budgetary constraint of the fashion-follower, integrating the newest trends into an existing wardrobe and most important of all, maintaining either a high leve l of real disposable income or a deep line of credit (Scott 2007, p. 567). For educational purposes, students of econom ics learn from the very beginning of microeconomic study that a consumer's preferen ces are independent of outside influence, at least with regard to others' prefer ences and buying behavior (Munier 2005, p. 66). What is achieved is one less "moving part" in the overall consumer theory preference structure, which allows more definitive answer about predicte d behavior given a particular change, namely in price of a good or income level. Both of those changes are tied to fundamental concepts of microeconomics: the first is the substitution effect, seen when the price of one good goes up, the consumer will shift demand away from the pricier good and toward a relatively lower-pri ced one, while still trying to maintain the highest possible utility level. The second is the income effect which effectively shifts the entire budget constraint away from the or igin (reflecting ability to buy more goods overall) and allows the consumer to attain a higher overall utility level (indifference curve). In any case, preferences remain stable throughout and that's what allows economists to accurately predict buying beha vior both on the individual level and the aggregate level. Certainly there are examples in real life that reflect stable preferences and can verify the legitimacy of the fundamental a ssumptions made by neoclassical economists. These sorts of examples include purchase of durable goods, everyday food items, produce, and most other goods and services consumed by a household. 8


II. Thorstein Veblen However, as Thorstein Veblen expresse d at the end of the 19th century, existing consumer theory failed because it refused to re cognize that a large part of an individual's consumption of goods and services was shaped by social relationships and by the need to secure status within society (Mason 1998, p. 51). In his 1899 book Theory of The Leisure Class, Veblen indicated that the most primitiv e way in which members of society could be hierarchically separated wa s by type of daily work: indus trial or non-industrial (p. 1). The latter was thought to allow for a much gr eater ability to pursue interests and hobbies outside of work, including art and music, whic h were seen as the only way to gain class distinction in that time period. It was the ability to take precious time, time which ordinarily might be used working to s ecure monetary gains for the household, and "waste" it by indulging in leisurely activities To purposefully abstain from working in order to enjoy nature or indulge in a hobby was a conspicuous wasting of time in Veblen's opinion. It conveyed power and wealth, as only the wealthiest had the means to participate in such frivolity and still main tain a reasonable standard of living (p. 35). This was the precursor phenomenon to what many now know as "conspicuous consumption." At some point the attitude towards time management changed, with productive efficiency and interest in busine ss excellence taking precedence. The next best thing to wasting time oneself was to allo w your spouse and children to waste money (p. 68). This is because, as with modern wea lthy consumers, basic needs like shelter, clothing and foodstuffs had already been procured. It was the embellished clothing, opulent home furnishings and extravagan t jewelry which provided critical social utility to the classes of wealth, as it blatantly displaye d wealth and class and visually separated the 9


wealthy from the poor. To consume purely base d on social utility was outside the scope of traditional economic principles. However, Veblen also predicted what would become an even more powerful socio-economic force in modern society: co nspicuous consumption in all levels of society, even the lowest ones. As he explai ned it, there were two modes of conspicuous consumption: invidious consumption, meant to maintain the gap between the classes with ever grander and more expensive goods purchased by the wealthy, and pecuniary emulation, which described the conspicuous consumption decisions made by the lower classes in order to gain acceptance or visibility within a higher social-economic class (p. 22). In our modern society, it seems that both of these subs ets of conspicuous consumption still occur every da y and are reinforced by instit utions such as the fashion print media, music, television and easy access to "status goods." After the initial shock of Veblen's a ssertions about goods and consumption in society, there was a significant period of sile nce on the subject (50 years), as Veblen was seen by many as more of a sociologist than an economist (as few of his observations were backed with mathematical evidence or proofs) and many in the academic world took his arguments as an attack on the rich and th eir spendthrift ways (M ason 1998, p. 60). It was for this reason that the issue of social in fluence on consumer choice was effectively neglected until the middle of the 20th century. In 1948, Morganstern was one of the first since Veblen to highlight the problems with what he called "additivity," the process by which aggregate demand for a good or service was calculated as a simple addition of all of the individual demand curves for a given good or service. Morganst ern claimed that one could not simply utilize the process 10


of additivity because each individual demand curve could be influenced (and frequently was) by others' buying behavior (p. 175). In other words, preferences weren't given, as assumed in conventional economic theory, but instead were born in part from personal taste but also from social interaction and influe nce, especially in the case of goods used to convey status through conspicuous consumpti on throughout history. Ot hers like Stigler (1950) and Leibenstein (1950) concurred with Morganstern and were sympathetic with Veblen's views. As you could imagine, this was not the easiest thing for the economic profession to digest and in large part still persists as a subject which is difficult to integrate into basic economic principle and dialog. III. Harvey Leibenstein In his 1950 paper in the Quarterly Jour nal of Economics, Harvey Leibenstein echoed Morganstern's thoughts on additivity (p. 183) and took the original Veblenian concepts another step in the then unpopular direction by asserting that consumer demand for goods could be separated into two categ ories: functional and non-functional. The latter category was then split into three subc ategories: demand driven by external effects on utility (which then was split into three "effects"), speculative demand based on expected future market conditions, and irrational demand, which included purchases made on a whim with no real rational purpose. He did not claim that demand based on external effects was irrational, which was in direct opposition to much of the accepted views of the period (p. 188). 11


Further, Leibenstein coined several terms that are frequently used to describe motivations for status consumption today: 'Bandwagon Effects,' 'Snob Effects' and 'Veblen Effects.' According to him, each effect was di fferent but represented a specific explanation behind the umbrella concep t of interdependent demand curves. Bandwagon Effects are present when an i ndividual will demand more (or less) of a commodity at a given price because some or all other individuals in the market also demand more (or less) of the commodity ( p. 190). Please see the Bandwagon Effect figure at the end of this chapter on page 27. In the figure, the steeply -sloped demand curve labeled D^a represents the quantities demanded at alternate prices if all consumers believed that the total demand was a units. This follows for the curves that expand parallel to D^a with labels D^b through D^n. Further, point E^a on curve D^a represents the amount on which the consumers based their individual demand curv es (the amounts that consumers expected to be the total market demand). Leibenstei n is sure to point out the assumption of accurate market information that allows him to determine points E^b through E^n on curves D^b through D^n which he says represen t a series of virtua l equilibrium points. Given accurate market information, E^a through E^n are the only points that can become actual quantities demanded. The locus of all these points (DB) is therefore the actual demand curve for the commodity (pp. 194-195). In addition, Leibenstein traces out the change in quantity demanded due to a change in price by separating the total change into a price effect and a bandwagon effect. In the diagram, there is a price decrease from P2 to P1 and as a result, total quantity demanded increases from a to c However, as Leibenstein points out, only part of that 12


total change is a result of the price reduction. At P1, if consumers didn't react to each others' demand, then the qua ntity demanded would be x However, because the price has dropped and demand has increased, an additiona l number of consumers are induced to enter the market or to increase their demands Therefore, quantity demanded shifts out even further to c So ax is the price effect and xc is the bandwagon effect (p. 196). Snob effects, conversely, are simila r to bandwagon effects in that demand behavior for a commodity is a function of th e price and the total market demand, only the consumer's demand is negatively correlated with the total market demand (p. 199). Please see the Snob Effect figure at the end of this chapter on page 28. Here the analysis is much like that of the bandwagon effect. The individual demand curves D^a through D^e move leftward as the total market demand increases (due to snob behavior) and th ey intersect the Ds curve at points E^a through E^e at the virtual equilibrium points (assuming accurate market knowledge). Given a price change from P2 to P1 Leibenstein again separates the price effect from the snob effect. In the diagram, P1 matches a quantity demanded of x on the D^a curve. However, because of the snob behavior, whereby the total quantity dema nded has increased so some snobs have left the market or demanded less, the net effect is only an increase in quantity demanded to b. Therefore, the price effect is ax and the snob effect is bx (p. 201). Along with the Bandwagon Effect and the Snob Effect, Leibenstein proposed a third driver of demand: Veblen Effects (p. 202). In this in stance, demand is seen as a positive function of price. As the price increases, the demand increases; this is in direct opposition to neoclassical economic literature which says that for almost all goods, demand increases as price decreases. The reas on for the seemingly illogical nature of the 13


Veblen Effect is that high price is an indica tor of high ability to pay and in turn, social status or prestige. Naturally, this can onl y apply to goods which have a high income elasticity, as such things as basic food and clothing commodities certainly carry little social cache and therefore would have little possibility of gaining greater desirability with a minor increase in cost. Leibenstein went further with the Veblen Effect, however, and posited that a product's price consisted of two different subprices: the real pr ice to the consumer and the conspicuous price, which is the price that th e buyer thinks other people thinks he or she paid for a good (p. 203). Further, the demand for a good used as a means of conspicuous consumption is a function of both the real pr ice and the conspicuous price. In highly organized markets, these pri ces might be identical; however in most cases they might differ if a consumer can get a "deal" or discount for a good without anyone else knowing. Please see the Veblen Effect diagram at the end of this chapter on page 29. In a graphical representation, the Veblen effect can be confusing. On the vertical axis is price, which can be either real or conspicuous (the horizontal axis is quantity, as normal). Each of the downward-sloping demand curve D^1 (followed by D^2 through D^5) represent the quantities demanded at alternate prices if all the consumers expected a conspicuous price of Pc1 (or Pc2, Pc3, etc...). To obtain Dv, we assume that consumers in the market have accurate knowledge, meaning real price is equal to conspicuous price, so there is only one point on each demand curv e D^1 through D^5 where there is a virtual equilibrium point (labeled E^1 through E^5) (p. 203). Again, Leibenstein separated the price effect from the Ve blen effect in this graph. A decrease in price from P4 to P3 will induce a net decrease in quantity demanded from 14


S to R. Given only a change in real price and no change in co nspicuous price, the quantity demanded would be T. However, assuming accurate market knowledge which keeps conspicuous price and real price equal, the Veblen effect (decrease in demand as a result of lower conspicuous price) completely overrides the price effect and pushes total quantity demanded to R (p. 204). Leibenstein goes on to note that the Dv curve can be positively sloped, negatively sloped, or a mix of both, depending on whether at alternate price changes the Veblen effect is greater or less than the price effect. IV. James Duesenberry Duesenberry was the next to continue "f leshing out" many of Veblen's original concepts and ideas which, as mentioned, were sl ow to stick with many social scientists as legitimate and accurate. In 1949, Duesenberry described an effect he called 'the Demonstration Effect.' He said that ma ny households, as one buying unit, tended to compare themselves with others of comparable lifestyle and economic standing. When one household altered their spending habits in a way which tended to increase their consumption quality (newer, bigger, better), a ll the others like it te nded to break out of their spending habits and emulate the first fa mily. As Duesenberry put it, this could be independent of price or income He also made sure to point out that the frequency to which a family would come into contact with superior goods increased as the consumption of superior goods by other families they considered increased (p. 27). This, Duesenberry argued, was apparent because personal drive to maintain selfesteem through consumption and the securing of social status was basic and natural in 15


each person or household, especially in a so ciety where increased quality of life and living standards was a clear goal. He went on to say that much of this status-preserving consumption was largely lacking in real ut ility and practical use and was therefore wasteful (Mason 1998, p. 102). Duesenberry followed this position with th ree reasons that people feel the impulse to conspicuously consume: first, to "keep up with the Joneses," or in other words, maintain a level of consumption equal to that of a peer group with which one identified. Second, they consumed conspicuously to pr eserve social distance between groups of lower social and economic status. And third, they conspicuously consumed in order to aspire to join groups of highe r social and economic status. In a closing statement about consumption and the ineffective nature of additivity, Duesenberry said this: "The vi ew that preferences are a ma tter of individua l personality alone is certainly untenable. The differences in consumption patterns between societies and the similarities within them require us to regard consumption behavior as a social phenomenon" (Duesenberry 1948, p. 112). This, like many of the other conclusions of theorists before him, was difficult for classi cal economists of the time period to digest and accept. True to form, many were quick to criticize Duesenberry's views, saying he placed too much emphasis on the consump tion function and indicated that social pressures in society were unrelenting (Mason 1998, p. 103). V. Milton Friedman Among some of Duesenberry's detractors was Milton Friedman, famed economist of the 20th century. In his 1957 book A Theory of Consumption Function, Friedman came 16


up with the idea of 'permanent income,' wh ich essentially said that a consumer's consumption and savings decisions were info rmed by his expected permanent earnings (Gordon 2009, p. 488). By this, Friedman meant th at transitory changes in income would not significantly impact consumption over ti me and that any increase in permanent income would slowly shift consumption highe r but drastically or all at once. This particular perspective proved popular in the field overall because Friedman considered a theory of consumption purely in economic terms that were easily quantifiable and gave little credence to th e idea of interdependent aspects of individual demand. About the same time that Friedman pub lished his Permanent Income Hypothesis (PIH), another theorist proposed a similar theory of consumption behavior. Franco Modigliani introduced his Life-Cycle Hypot hesis (LCH), which said that consumers would try to smooth out consumption over thei r lifetimes as best they could by saving over and above their consumption during thei r working years and then drawing down on savings during retirement years, when wo rking is kept to a minimum (Gordon 2009). Both are plausible theories explaining the consumption and saving behavior of consumers, although neither mentioned the interdependence of demand curves. Despite this slight setback in terms of the Veblen camp, the issue of conspicuous consumption was far from settled one way or another a nd Friedman and Modigliani were followed by a string of theorists who drew upon the c oncepts originally put forth by Veblen. As the 1950s drew to a close and the 1960s began, conspicuous consumption was in full force and as Mason describes, for the first time there was a sense of the wealthy being separated into 'old' money and 'new' money. The former was long-established and in many cases, inherited wealth. Throughout the 1920s, the Depression and the Second 17


World War, the old money had spent in a 'circumspect' manner (Mason 1998, p. 107) so as to avoid needless attention or disapproval from those suffering throughout those periods. Entering the 1950s and into the 1960s, when almost a ll levels of income shifted up by some degree and 'basic needs were met,' conspicuous consumption took a prominent role in social lives of almost al l American people, and as John Galbraith put it bluntly, "the rich have become more numer ous [so] they have inevitably become a debased currency" (Galbraith 1958, p. 74). VI. John Galbraith In 1958, John Galbraith published a book entitled The Affluent Society where he outlined trends he saw as particularly damaging to the social, political and economic standards in American (He ilbroner 1989, p. 368). This would be the first of many books published by Galbraith making bold statements about Americans and their contented, capitalistic, carefree lives. Consequently, almost all of his works have drawn considerable criticism for their lack of demonstrable ri gor or hard data in order to prove his controversial points. Robert Heilbroner, one of many who have critiqued the book, explained that one of the problems with Ga lbraith's claims is that many are purely observational and are indeed difficult to quant ify (p. 374). Even so, one would be hardpressed to claim they were outwardly false or completely based outside of reality and, as a result, The Affluent Society along with many of his ot her books are often cited in political economy courses as well as in debates about consumer behavior and the consumer-producer relationship. 18


Galbraith's book covers several topics. On e of the most well-known sections is passage where he criticizes the idea of c onventional wisdom, stating that its most important factor is not its truth but its accep tability (Galbraith 1958, p. 6). He also says that there has been a shift from concern with public welfare and public goods to a overarching interest in self-achievement, self-improvement, and consumption of goods which convey social status to one's counter parts on behalf of th e carrier or owner. Galbraith described this shift in terms of beautiful homes and luxurious cars next to potholed roads and a collective disinterest in paying for public works projects over improvements to one's individual environment. In addition, Galbraith described a phe nomenon he called "the Dependence Effect" (p. 124) in The Affluent Society. He asserted that consumer sovereignty was no longer operating and that producers were no longer re sponding to the tastes of the consumer. In the past, the producer based wh at it made and sold ever y quarter on focus groups and predictions about trends in c onsumer behavior, as well as le arned mistakes from previous quarters' sales. Instead, in this new dynamic, producers were creating those trends and behavioral patterns through a dvertising in order to create demand for their products. Galbraith's point was to clarify the co nsumer-producer dichotomy and say that American consumers buy things they think they need, things they think others expect them to purchase and have, or things that are 'in style,' all of which are informed by television and print media advertising that appealed to the emo tional or idealistic sensitivities of American consumers. This particular view both validated cons picuous consumption as a real identifiable social force and placed substantial emphasi s and power in the hands of producers and 19


advertisers. Considering the cla ssic view of advertis ing, that it often provides little useful information and may be a inefficient us e of resources (Case 1999, p. 341), most economists didn't validate this view of Galbraith 's in the least. For this he remained an anomaly in the economics field until his death in 2006. In 1960, a social psychologist named W oods published a paper that echoed many of the claims of those before him, including Galbraith. He said that purchases were made not for rational reasons but mostly for irrati onal reasons, of which he gave two: affective appeal, meaning they were bought impulsively for physical product qualities like color and design, and symbolic appeal, which he described as "emotional behavior generated by thinking about the meaning of a product pur chase rather than the function of the purchase the perceived prestige of ownershi p comes to be more important in bringing about a purchase than the function which the product would serve" (p. 17). Woods rehashed some concepts which had already been put forth (about purchases being made for reasons other than pure preferences) but also supported Galbra ith as well (in saying that purchases had a meaning which was inform ed by advertising and social influences). VII. Kelvin Lancaster The next major contribution to the disc ipline came in the form of Lancaster's "three new assumptions" in his 1966 article A New Approach to Consumer Theory his three assumptions were: (1) a good didn't pe r-se possess utility. Rather, it possessed characteristics which gave it its utility. (2) A good would in general possess more than one characteristic and many characteristics we re typically shared by more than one good. 20


and (3), combinations of goods could possess characteristics different to those offered by the same goods separately (p. 134). As Mason mentions, although Lancaster showed no enthusiasm for adopting a more heterodox view of consumer demand, his 'revealed preference' model did offer a potentially more constructive framework for analyzing the nature and consequences of interpersonal effects on prefer ence formation. In particular, the concept of products as bundles of characteristics could have been exte nded to include such elements as prestige, high price, snob value, social visibility or th e consumption of others as relevant factors which in many markets had become notable influences on purchase decisions after 1950 (Mason 1998, p. 118). Lancaster's characteristics and utility perspective could account, as Mason touched on, for the relative interchangeability of goods that share similar utility-bearing characteristics, even if they are slightly different in some negligible way. We will return to the topic of Lancaster and his Attribut e Analysis theory later in the paper. VIII. Others To take the idea of clustered consump tion to a social le vel, Hayakawa and Venieris (1977) proposed two additional axioms First, that social groups existed with distinct lifestyles and associat ed clusters of wants; second, that a consumer as a function of his social status identifi ed himself with and emulated a social group (p. 603). They also said that in the short run, individual's desires were predetermined by the relevant reference group and were relatively stable. In the long-run, the desired bundle would change in unison with the re ference group changes. On an individual basis, it was also 21


possible for individuals to have a shift in so cial status which would be accompanied by a change in reference group identification (p. 612). Part of their argum ent for consideration of reference groups was that, given a look at any modern advertising campaign, the appeals were almost always directed at th e attractiveness of a reference group over the distinct qualities of the product in question. In 1977, Becker and Stigler published a study claiming that the commodity produced by fashion goods was certainly social distinction, which in and of itself had stable demand. It was the goods themselves, the vehicles of style, which had unstable or unpredictable demand, as trends were quick to come and go and brands had boom and bust periods. Therefore, they said, the demand for social distinction in goods could be analyzed purely in terms of price and income effects and changes, the two most basic behavioral factors of economic decisions (p. 89). This view emphasized the stability of demand for the intangible commodity of style rather than the brand or the particular good itself. Stigler and Becker went on to say that, ceteris paribus, when a one's income increases, one's demand for social distincti on increases, which can be achieved in part through the purchase of fashion commodities and goods. Consequently, if the consumer had an average income elasticity of dema nd for distinction, that would imply a high income elasticity of demand for fashion or other distinction-pr oducing goods, which is consistent with the classic judgment that fashion is a luxury good (p. 88). They go on to make a point about how th e commodity of distinction is relatively finite and that any increase in one person's distinction lowers the collective di stinction of 22


all other people, explaining the need for t hose subscribing to the fashion trends to conform to new fashions on a regular basis. In 1991, Solomon and Buchanan built upon the original "consumption constellation" work done by Solomon and Assael in 19877 by looking specifically at the urban "yuppie" as a social ro le which informed consumption of a variety of products. They examined consumption of upscale magazines, credit cards, upscale ice-cream, luxury appliances, foreign cars, foreign wine s, urban sports and upscale television shows in objectively defined "yuppies" versus in the general population. Their findings showed that there were significant constellat ion effects in the yuppie set (p. 102). Building on this idea of grouped consump tion, I think of modern fashion items. Despite many people's insistence th at their personal adornments be expensive (or at least that the conspicuous price seem expensive) and convey some sort of prestige, what the brand is or what functional st yle of bag or shoe it is rela tively unimportant. Similarly, many people are concerned with the "total package" effect (i.e., a constellation consumption set) over just one or two items wh ich they feel convey prestige and status. If someone is hoping to emulate the wealt hy by purchasing an expensive handbag (or manbag)8, the effect is ruined when the emulator emerges from a typical, everyday car or wears typical everyday shoes. In this way, having the bag, the shoes, and the car helps to solidify the overall reco gnition of status and most likely provides higher utility overall 7 "Consumption Constellation" is defined as a cluster of complementary products specific brands and/or consumption activities associated with a social role. Buchanan 1991, p. 97 8 Men are no longer excepted from the luxury goods market place, where male-oriente d products are just as popular as female-oriented ones. 23


than each of the goods separately. Stop by your local Starbucks Coffee and observe these concepts in effect.9 As Mason points out, the years following the 1977 Stigler and Becker paper saw a great shift in attention from the generic stat us-conveying commodity to the specific brand name and image which more precisely conve yed social status and image (Mason 1998, p. 131). As a natural progression, the things wh ich formed the bundle of status-conveying goods in the previous years tended to beco me the base consumption level for a much wider range of consumers, strippi ng them of their prestige value, at least in part (p. 131). After having viewed the conspicuous consumption market in terms of durables and goods which conveyed status regardless of brand, the next step in conspicuous consumption was the purchase of fashion items and accessories which bore the name of any number of famous fashion designers a nd which were readily available to and popularized by younger people with disposable income to buy such things. As Mason suggests, in the early 1980s the era of brand image and th e designer label had arrived (p. 131). In Bocock's 1993 book called Consumption, he had the following to say about these new symbols: "The status symbols of earlier generati ons have become increasingly unable to convey their former meanings, as the names of the high-status fashion houses appear on the clothing and body accessories, which are purchased by anyone who can 9 My point here is that Starbucks coffee may be seen by status-conscious consumers as just one of many commodities which they consume in order to convey status and prestige. In all likelihood, given that assumption, one would likely see some patrons of the coffee-house wearing high-end fashion items or driving an upscale automobile, both of wh ich are closely associated with status 24


afford them and who wishes to purchase th em. Everyone who has the money may buy top designer labels under these conditions, regardle ss of their occupati on or social status."10 Bocock's quote adequately summarizes the direction that high-fashion status goods have gone in the past several decades and especially of late. Fashion (and therefore status), seen as an exclusive club of insiders with knowledge of what to buy and where to get it, has shifted to a realm where almost anyone can purchase and participate. If not fully decked with the latest re ady-to-wear and accessories, most people can realistically participate with just a piece of the magic. Naturally, with more accessible prices ($300 for a wallet verses $3000 for a custom-made luggage item) come more cons umers willing to buy a piece of the dream. Consequently, goods that bear the name or l ogo of a brand but which are at an accessible price for anyone wanting to cross that soci al threshold are the "meat-and-potatoes" of many high-fashion brands...they ar e the cash cows and they a llow the brands to thrive.11 An appropriate closing statement about the status of the literature at this point comes from Alan Shipman in his 2004 paper: "If the acts of buying and consuming yield utility in themselves, it may not matter if wh at is bought and consumed has little or no practical value" (Shipman 2004, p. 278). Certainly, economists care greatly about the efficiency of what is produced and consumed in the product markets, but in the end, it seems as if the trend of consumption of products for reasons almost entirely removed from their intrinsic qualities is fading away and may be moving toward the next true realm of conspicuous consumption, where w ealthy consumers invest in cultural and 10 Bocock (1993) 11 In some instances, the profit margins of handbags (which require no sizing or alteration) can be up to 13 times their production cost. See Thomas 2007, p. 168 25


experiential capital that isn't wasteful and isn't nearly as easily attainable by the masses. As Shipman puts it, a shift from "waste" to "taste" (p. 279). 26








Chapter 2: Luxury Goods and Lancaster's Attribute Analysis I. Lancaster's Three Assumptions In 1966, Kelvin Lancaster published an ar ticle in which he proposed a different way of measuring the utility of a good and analyzing consumer decisions. Neoclassical approaches assume that a good has a given leve l of utility and consumers either choose to consume it or do not; neoclassicists do not ask why (Douglas 1982, p. 49). Lancaster proposed three new assumptions about goods and their utility (Lancaster 1966, p. 134). They are: (1) The good, per-se, does not give utility to the consumer; it possesses characteristics, and these charac teristics give rise to utility. (2) In general, a good will possess more than one characteristic, and many characteristics will be shared by more than one good. (3) Goods in combination may possess characteristics different from those pertaining to the goods separately. In his opening paragraphs, Lancaster men tions that a meal, treated as a single good, possesses multiple characteristics like flavor and aesthetic value. Similarly, a dinner party, by definition a combination of two goods (a meal and a social setting), may possess nutritional, aesthetic and perhaps intell ectual characteristics different from the combination obtainable from a meal and a so cial gathering consumed separately. His point was to say that even the simplest c onsumption activity is characterized by joint outputs and that while as a good it may seemi ngly be unrelated to other goods, it may indeed be related to them in the context of attributes (p. 133). This perspective both 30


greatly widens the ability to understand a nd explain consumption of goods while also leaving little to constrai n the definition of a good. The essence of Lancaster's first princi ple can be summarized in one of his examples. Classically, a red Chevrolet and gray Chevrolet are either the same commodity (ignoring a potentially relevant choice factor ) or completely different commodities (and are not close substitutes). Lancaster claimed that both items could be represented by satisfaction vectors differing only slightly, in this case by color. By that method, the choice situation could be carried out in the same manner that regular consumers approach it every day (p. 134).12 Lancaster stressed the importance of moving to 'multiple characteristics' in order to properly represent the numerous intrinsic qua lities of most consumer goods. After all, you don't buy strawberries purely for their tast e, their color or price, but rather a combination of the three. Several decades after La ncaster's original papers, Evan Douglas published a textbook which better explains the "new theory of demand." He summarized the attribute analysis approach as a more direct way of looking at consumers' demand for goods because it was the characteristics themselves consumers were after, not the products that provided them. In that vein, to better integrate marketing and economic applications of consumer choice, one might use the Lancaste rian Attribute Analysis to ascertain the specific characteristics desire d by consumers, how they perceive products' ability to provide those characteristics and then how marketing and other methods might change consumers' perceptions of products and how market shares might change as a result. 12 In order for the analysis to be carried out for durables like automobiles, where only one will be purchased at a time, it is necessary to assume that the consumer is contemplating a number of vehicles that are of essentially equivalent price. 31


Further, he said that given a desired set of attributes and knowledge of the goods that provide those attributes in the appropriate quantities, ec onomists could still choose the combination of attributes which maximizes the consumer's utility (Douglas 1982, p. 51), just as had been done using neoclassical methods. II. Product Rays in Attribute Space In order to visually represent two or mo re competing products and their respective levels of two characteristics, Lancaster used "product rays" in "attribute space" instead of product space.13 A two-dimensional graph was the ba sis for this representation and the explanation is straightforward. In a exam ple involving restaura nt choices, Douglas compares six restaurants each with varying "ratings" for two given attributes: exotic atmosphere and haute cuisine (Douglas 1982, pp. 52-54). Figure 3-1 is reproduced from Douglas' text for your convenience. See Figure 2-1 at the end of the chapter on page 46. As you can see, each restaurant is represented graphically by a ray from the origin with the ratio of atmosphere to cuisine as its slope. In the extreme case, Restaurant A provides 89 utils14 of desirable atmosphere to 22 utils of desirable cuisine (giving it the highest slope with a ratio of 4.05:1) for one meal. Alternatively, Restaurant F provides 10 units of atmosphere to 77 units of cuisine for one meal, giving it the flattest product ray with a ratio of 0.13:1. Naturally, given this particular consumer's desire for both a delightful atmosphere and inspiring cuisine, Douglas assumes that the consumer will 13 Looking at only two attributes is the simplest way to model this type of analysis if you're using a twodimensional diagram. 14 I have used "utils" instead of "units" because this is for 1 meal only, so it is a per-unit measure (per meal). 32


spend his or her restaurant budget on one or more restaurants which will provide the most of both attributes at the lowest cost. This consumer's optimal bundle of goods is subject to a budget constraint and the per-unit prices of the goods in question. For th is case, the consumer faces a restaurant budget of $100 (M) and per-unit prices ranging from $18.95 to $27.30 for each of the restaurants. The consumer can therefore afford a bundle of goods which is subject to the following equation: PxX + PyY < or = M This means that the price of good x (Px) times the number of units of good x plus the price of good y (Py) times the number of units of good y must be less than or equal to his budget (M). In this case, good x and good y can be any two restaurants at which this consumer chooses to consume meals. With $100 allotted to restaurant spending, the consumer may choose to go to any of the restaurants roughly 4 times, hence Douglas' plotting of the product rays out to about the 400 util mark on the graph. On the graph, points on each of the pr oduct rays A through F are placed to indicate the budget constraint. The line joini ng points A through F on each of the rays is known in this analysis as the "efficiency fron tier" in attribute space (p. 54). As Douglas describes, the consumer can choose any point on this line, even if it falls between two rays by consuming a combination of goods. Th e frontier is called efficient because a rational consumer (one maximizing his utilit y subject to an income constraint) will choose an attribute set on the frontier, ther eby spending the entire budget and deriving as much utility as possible, instead of one in side it, which would represent spending less than total budget and getting le ss than possible utility (p. 55). Given a set of indifference 33


curves which express a particular marginal ra te of substitution between the two attributes, one can determine the optimal combination of the two attributes for the rational utilitymaximizing consumer. See Figure 2-2 at the end of the chapter on page 47. In this case, indifference curve I* maximizes utility, tangent to the efficiency frontier at point R As you can see, this consumer has chosen a bundle which falls between product rays, meaning the consumer will mix the two products that the chosen bundle lies between (in this case Restaurant D and Restaurant E). This means the consumer will have to consume some amount of Restaurant D and then switch to Restaurant E although when and in what order is entirely va riable, just as long as the consumer reaches point M after having sp ent $100 between the two restaurants. This is a simplistic example, only pertaining to two desired attributes in a market of only a handful of possible product choices. In reality, there may be many more desired attributes and as Douglas remarks, "if the consumer desires n attributes, as many as n products might be required to provide the optimal combinatio n of attributes" (pp. 56-57). Cars are a good example of products that provide an array of attribut es in a variety of combinations and which tend to require much weighing and considering before purchase. Of course, the purchase of a car is usually a more serious, more costly decision than a restaurant dinner and usually people only purchase one car at a time, making them effectively "indivisible," restricting the consumer to the nodes (along rays) on his efficiency frontier (p. 57). 34


However, with regards to luxury goods, b ecause they generally require relatively less of a commitment than cars and can be mi xed in order to obtain multiple attributes, the analysis for indivisible goods will not be discussed further. III. Changes in Perceptions vs. Changes in Tastes Another advantage of the Lancaste r Attribute method over neoclassical approaches is its ability to distinguish between changes in perceptions and changes in tastes for an attribute. The first refers to how much of a given attribute the consumer perceives to exist in each unit of the product in question. A change in perception can be represented on the efficiency frontier graph as a shift in one or more of the rays or a shift in the frontier itself. A change in tastes refe rs to the amount of utility that the consumer expects to derive from each unit of the produc t and is visually represented by a shift in the indifference curves (Douglas 1982, p. 65).15 If something happens that makes the consumer perceive the existence of more or less of an attribute in a product than he may have originally thought, then for the same price as before the consumer has the possibility of getting more of a utility-bearing attribute for his or her money by purchasing more of the product in question or by beginning to purchase it. See Figure 2-3 (based from Douglas text) at the end of the chapter on page 48 for the graphical representation of such a shift in perceptions. In this case, there are three bags of differing brands with an initial efficiency frontier th at maximizes utility at point C, using indifference curve I0. After a change in the perceive d level of 'status' in Brand B bag (keeping an identical leve l of 'trendiness') the consumer now maximizes utility at 15 A consumer's indifference curves shift because of a change in marginal rate of substitution (MRS), which reflects the consumer's preference for one attribute relative to another. 35


point B'. The frontier has shifted to reflect th e altered perception of the status provided by brand B. Remember, the frontier is based on what the consumer perceives to exist in each unit of a product. Provided new information or a particularly persuasive advertising campaign, the consumer now believes that he or she can get more total of the status attribute with no change in prices or budget. The highest possible point on the brand B ray shifts out to B'; the frontier ther efore shifts as well to illustrate the change in perception. As a result of such a shift in the efficiency frontier, the consumer shifts total consumption from brand C only to brand B onl y. It may be that the consumer plans to purchase only one bag and is therefore restri cted to one the nodes on the product rays. In the case where the consumer was buying mu ltiple units, he or she may choose to consume some of each brand. It could also be that the consumer is already purchasing multiple units and simply prefers all brand C at the original efficiency frontier and all of brand B at the new frontier.16 In a neoclassical approach, after a cons umers shift from one good to another, one could only assert that the consumer's tastes had changed, for one reason or another; whether for perceived characterist ic reasons or actual taste changes would remain unclear. In the case of luxury goods, it seems plausi ble to say that changes in perceptions and perhaps changes in tastes may have coll ectively taken place over time and increased the American appetite for such items. A dvertising campaigns in magazines and on the Internet, word-of-mouth recomm endation and images in film or television certainly may 16 What would tell us more about her behavior would be her budget constraint and the per-unit prices of each of the goods. 36


have played a part in our so ciety's interest in and percep tion of luxury goods as providing endless amounts of status. Advertising in general has been called "the most poten t influence in adapting and changing our habits and modes of life, affecting what we eat, what we wear, and the work and play of the entire nation" (DeBono 1985, p. 586). Further, it "dominates the media and has vast power in the shaping of popular standards" (p. 586). Given its apparent influence, which often makes appeals to the image or quality of a good and the importance of image and quality in the success of luxury goods (or at le ast in theory), one could assume that advertising does have some effect on a consumer's perception of the attributes present in a good and how much of each attribute there is. IV. Attributes in Luxury Goods The research on luxury goods seems to i ndicate that the associated attributes include social status, prestig e, style, uniqueness, value, and quality (Johnson 1999, p. 3), although which brands and goods provide these varies. When comparing luxury briefcases from, say, Tumi and Montblanc, one may find that they provide different amounts of some of the same characteristics wh ile also having some characteristics that are unique to each. The Tumi briefcase may provide less status, less prestige and less uniqueness while providing more value and possi bly more quality, as it is produced of ballistic nylon which wears better than the leather of the Montbl anc. Conversely, the Montblanc briefcase may be more sleek and impressive, bestowi ng more status and prestige upon its carrier. In any case, the consumer in question would have to weigh his or her preferences for each of the attributes and then decide which bag (or both, if his or 37


her budget allows) is appropriate for his or her purposes and provides a suitable amount of utility. The above example could be replicated for decisions even between goods within a particular brand. In that case, a consumer might compare a Gucci logo-covered canvas handbag (conspicuous), which would carry a lower price relative to a non-logo-covered leather handbag (with less conspicuousness and a significantly higher price) both of which provide differing levels of some of the attributes listed above. In fact, conspicuousness may be seen by some consumer s as a direct attribute rather than an indirect one in the choice between an item that visibility displays a logo and one that does not within a given brand. In other words, while status may be one desired attribute in luxury goods, some consumers may approach the decision also c onsidering the pure conspicuousness of the product as a desirable attribute which may in itself, independent of status, provide utility to the consumer. Status may be a secondary effect of the conspicuousness of a product which matters to some but not all consum ers. This would represent a more purely Veblenian definition of conspicuous consump tion, which doesn't necessarily assume the pursuit of status, but rather simp ly the desire to signal wealth. Of course, all of these examples assume an understanding that people are still consuming, at a basic level, for the purposes of subsistence (in the case of the restaurants) or for functional usage of a bag or satchel (in the case of luxury fashion goods). Those more primary motivations for such purchases are implied and are previously explained in the neoclassical theory of consumer choice. The Lancaster Attribute Analysis assumes the presence of those aspects but adds a secondary layer of analysis which allows for a 38


better understanding of consumer choice betw een brands or produc ts which otherwise might be seen as entirely different commod ities or identical products, neither of which are particularly fruitful in explaining realistic, modern consumer choices. V. Status in Luxury Goods Status as a desirable attribute in co nsumer products has been shown to be a motivating force behind the consumption of luxury items, at least empirically for a handful of product categories. In a study done on women's cosmetics, Chao and Schor (1998) found that in product cate gories that are readily visibl e to others (in this case, lipstick), purchasing of brand-name products at a higher cost was significantly more prevalent than in categories that aren't as publicly visible (facial cleanser) (Chao 1998). To connect brand-buying be havior to status motivati ons, they also found that there was zero difference in qua lity across the range of lips ticks, leaving very few other explanations for the purchase of the higher-p riced, publicly-visible items other than for status reasons. Of course, one could argue that Chanel is the only brand to produce a specific shade of lipstick and that simply in the pursuit of the 'perfect shade,' consumers decided to pay the price premiu m, ignoring the status attribut es of the product. However that explanation wouldn't hold across any si gnificant number of consumers unless they were all consuming the same shade of lipstic k and for the same reason (its uniqueness). Chao and Schor found ambiguous results for those products in the middle of the visibility range (mascara and ey e shadow), so placed because they have some chance of being seen in public but not nearly as much as lipstick, which can be carried and reapplied as needed throu ghout the day, often in public areas (Chao 1998, pp. 117-121). 39


The results of Chao and Schor might lead one to make similar assumptions about the luxury handbag market. The visibility of ha ndbags over other luxury goods is especially high and although there may be quality differences, any difference in items past a certain price point would probably be negligible. Many theorists and researchers have claime d that the display of status and wealth can be done through the purchase of luxury fashion goods, primarily because they are more easily attainable than other signals of status and wealth like automobiles and homes, as they are visible, portable and eas ily identifiable as one brand or another to relevant others.17 With regards to Lancaster's other origin al assumptions, there is also evidence to support the assertion that many people c onsume goods in bundles, which may provide them with more overall utility than the goods would otherwise, on their own. Consumption Constellations (Mason 1998, p. 133), as proposed by Solomon and Assael (1987), seem plausible in the context of stat us-seeking consumer be havior. In a study by Solomon and Buchanan (1991), meant as an empirical exploration of consumption constellations, buying behavior was studied in relation to social roles rather than attributes, which makes the results both informative and ambiguous for this argument. Nonetheless, they found that there was signi ficant correlation betw een those who selfidentified as urban "yuppies and the brands they consum ed across a number of product categories, which ranged from ice cream to cars (p. 102). Although this conclusion doesn't explicitly make reference to status consumption, it wouldn't be outside the realm of possibility to say that those seeking a common attribut e like status, who some may argue is exactly what "yuppies" do, would c onsume a variety of goods in bundles, all of 17 For further reading, see Mason (1981), Chao & Schor (1998), and Bagwell & Bernheim (1996). 40


which contain some level of status. There ar e ice cream brands which are expensive and made with "the best and the purest" which might go perfectly with a bottle of French wine and designer bowls and glasses. Working off of Lancaster's assumption that goods possess multiple attributes and that some attributes may be found in a number of goods18, there is evidence to support the claim that luxury goods possess characte ristics which are favorable to consumers. Dubois and Laurent (2003) found that luxury goods may be pe rceived as being luxurious because they have one or more of several attributes including quality, rarity, price, the use of the five senses, history/ tradition and usefulness/futility.19 They didn't explicitly find "status" as an attribute of luxury goods; however, it isn' t too far-fetched to assume that most of the attributes listed are often indi cators of status. Furthe r, assuming that the is more than one product category and bra nd that provides these attributes, it isn't outrageous to suggest that luxury consumers seeking such attributes will derive them from a variety of prod re ucts and brands. VI. Dual Choices In the case where status is an attribute in a number of luxury goods, one could say that the primary decision to buy a luxury handbag is a separate, status-motivated decision from the secondary choice between brands of luxury handbags, which may be based mainly in minute aesthetic details. This s econdary decision may functionally return our consumer to a more classical choice set which is free of status cons iderations. In other 18 I am assuming that "goods" can be used to describe different brands of a given product category, not simply different product categories. 19 Chiari, p. 6 41


words, the common denominator is status, which will be gleaned regardless of minor details regarding the bag itself. Assuming that a wealthy consumer had lit tle doubt about the decision to purchase a high-end timepiece but rather had uncertainty about which brand or what style, one could assume that the initial decision was status-fueled a nd that he or she took into account the fact that whether it be a Rolex timepiece or an Omega, both would provide some level of status and the decision to buy one or the other would ultimately come down to various minute differences in the features or aesthetics of the watches. The consumer is still making a status-induced purchase, but when comparing horizontally among consumers of similar incomes, one may see fewer "to consume or status or not" and more "status is assumed, now what color?" This primary and secondary choice se tup may indicate one reason why luxury department stores have done so well. They provide a variety of goods which all convey status, to some degree (depending on their visibility), so the choice to shop there and spend money there is the choice to consume st atus. Once inside, what goods are utilized as status-vessels are largely dependent on personal tastes, since almost anything a consumer chooses will be status-bearing. Th e shopping bag you get with a $50 cosmetics purchase and the one you ge t with a $600 shoe purchas e are one in the same. VII. What is Really Being Purchased? Another way to understand Lancaster's th ird assertion is by looking at the total experience of purchasing a luxury product. Fo r most normal goods, the purchase process is functional at best and pr ovides little over and above the qualities of the good itself. In 42


contrast, luxury goods are sold through glossy facades and over shiny counters. There is the process of choosing and trying-on. The buyer chats with a sales associate, who typically spends more time advising and maki ng pleasantries than your average clerk at Home Depot. Further, many luxury boutiques offer drinks or refreshments during the purchase experience; I myself have been offered water and soda at a handful of luxury boutiques. Further, many VIP clients (those who spend a set amount of money per year at a given boutique) are offered "freebies" for their pa tronage...which can range from samples of cosmetics or fragrances to scented candles or other home-decor/ambiance items. To finish off the experience, the goods are wrappe d in delicate tissue, pa cked into a sturdy box, and placed in a thick, glossy shopping ba g bearing the name or logo of the store brand. All of these things, plus the seasonal co cktail parties that are thrown every so often for clients to come in and peruse new collec tions and the personalized service from sales assistants, who wouldn't hesitate to call thei r best customer about new shipments, boost the "value-added" aspect of shopping at a l uxury boutique. VIP clie nt lounges are also becoming more widespread in luxury boutiques, especially in Asia where because so many people purchase luxury goods20 that the truly status-conscious must further differentiate themselves. These lounges are access-restricted and often require some form of membership (based on money spent in a given period). In this sense, the experience of pur chasing a designer item is not only the enjoyment of the good itself but also the pers onal attention, the fr iendly conversation and the often beautiful presentation of the good. Of course, they are taking your money and making an enormous profit...the least they can do is offer up a glass of water. 20 Dana Thomas estimates that one in five Japanese women owns a Louis Vuitton product 43


When you purchase a $1,000 bag, you are not only purchasing its leather, silver hardware and excellence of construction21, you are also purchasing an experience which adds to the justification fo r the price and to the allure of that boutique and brand. Lancaster might argue that the bag consum ed alone, without all of the hoopla, would provide less utility than it woul d with the excitement of the store experience and its perks. All of the attributes of the buying procedure are worthwhile to the luxury consumer and evidence of that might suppor t Lancaster's third claim. By Lancaster's definition, a luxury "good" could be the handbag itself, with the perks and excitement of the purchase experi ence or it could be the experience itself, which just happens to include a tangible pr oduct. Although the latter seems far-fetched, I wouldn't go so far as to discount the very complex motivations for luxury shopping by those who have seemingly endless streams of money and for whom money and things are never enough. Further, one could assert that the common pastime of window-shopping, or getting a free make-over (but not purchas ing), that a consumer is enjoying just a portion of the luxury buying experi ence that is so enjoyable. The Lancaster Attribute Analysis is usef ul in more accurately identifying what motivates the purchase of luxury and other nonessential goods. There are aspects of both the product and the experience that add to the overall value of th e purchase, such as status. Unfortunately, this appr oach lends itself to greater fluidity of the definition of a "good" and it can sometimes prove to be very difficult to pinpoint all of the reasons why people purchase luxury goods. And, all of the meas ures of perceived value and tastes for such attributes are subjective, meani ng they depend greatly on the consumer. 21 Whether high-priced bags are consistently produced at higher quality is debatable. Inevitably the inflated cost will be reflective of other factors, name ly brand image costs rather than labor or materials costs. This may vary depending on what brand is being consumed. 44


In any case, one of the greatest barriers to empiri cally testing these hypotheses and theories lies in getting information about the motivations for purchasing luxury goods from the consumers themselves, which is a complex problem as many may not feel comfortable admitting that they purchase l uxury goods explicitly for status reasons, at least in part. For that reason one can only in fer, based on more indirect observation, the exact motivations driving the consumption of luxury goods. Nevertheless, even with a dearth of empirical evidence, most of the Amer ican public observes or partakes in status consumption every day and can see for themselv es the kinds of trends that have emerged over the past several decades. 45








Chapter 3: Neoclassical Methods Section 1 Perspectives I. Intro In the Neoclassical tradition, consumers ar e seen as utility-maximizing in their purchase of goods and services, subject to an income constraint. They want to purchase a bundle of goods and services which provides th em with the highest possible level of utility, given stable tastes, while staying w ithin their budget. Usuall y, the easiest way to model such a situation is to pare down the variables such that consumption can be viewed in a two-dimensional diagram, usually with good x represented on the horizontal axis and all other goods on the vertical axis. Then, a budget line is created, intersecting the horizontal axis at the point where only good x is purchased, which is mo re specificall y, the income (M ) divided by price of x ( Px ). Since all other goods doesn't necessarily have a spec ific price, the price of $1 is used, which then makes the vertical intercept simply M With well-behaved preferences (convex to the origin), the consumer will choose a consumption bundle somewhere along the budget li ne that is perfectly tangent to the highest possible indifference cu rve, providing the highest-possi ble utility level for that income. If income increases, then the budget line shifts away from the origin toward the northeast in a parallel fashion (as prices ha ve not changed) and a higher indifference curve (and utility level) can be reached. Similarly, if income decreases, the budget shifts inward (toward the origin) parallel to the original budget curve and the consumer must 49


fall to a lower indifference curve (and utility level) due to fewer dollars available to purchase goods and services. In some cases, with an increase in income, consumption of both good x and all other goods' increases. In some cases, they both in crease but at differe nt rates. And in some cases, consumption of good x may fall or stay the same relative to an increase in income. All of these situations provide info rmation about the consumer's preferences for good x II. Cobb-Douglas Preferences for Status There are many ways to quantify prefer ences and algebraic formulas are easy methods to draw a consumer's various i ndifference curves. The Cobb-Douglas utility function is a commonly-used method of quan tifying well-behaved consumer preferences (Varian 2006, p. 64) as it presents the ut ility function in term s of two goods (say x and s ) and gives them each exponential values (the su m of which always equals 1). Importantly, in a Cobb-Douglas preference structure, a consumer will always purchase a positive amount of goods x and s For these goods, with these valu es, the utility function would be as follows: U(X,S) = X^(3/4)S^(1/4) As with any consumer decision situat ion, he or she is subject to a budget constraint, which is his or her income ( M ).22 In this case, that would be: M = PxX + PsS 22 This assumes all income is spent, which may not be the case in real-world situations. 50


The Cobb-Douglas utility function also implies that constant proportions of income will always be spent on good x and good s (3/4ths of M and 1/4th of M respectively). In this way, we can rewr ite the budget constraint as follows: M = (3/4)M + (1/4)M In turn, we can determine the demand functions for each good. Luckily, Hal Varian has done them for us (p. 93), and they are as follows: X = (3/4) M/Px S = (1/4) M/Ps Therefore, for any given M and given prices of good x and good s we can determine the optimal consumption level for each of the goods given these preferences. As you can see, Cobb-Douglas utility functions present a fairly straightforward method of measuring utility in a clean, simple way. Pleas e see Figure 3-1 the end of the chapter for a graph of the Cobb-D ouglas utility function: U(X,S) = X^(3/4)S^(1/4) on page 73. In this section, I use the Cobb-Douglas utility function to demonstrate that luxurygood consumption, which is commonly used as a means to convey prestige and gain social status23 can be modeled neoclassically24 under certain assumptions as to what constitutes a "good." According to Lancaster's Attribute Theory25, goods in and of themselves do not provide utility to the consumer. Rather, goods possess various attributes that provide the utility. In the case of a luxury good, "status" is one of th e attributes which are thought to fuel the consumption of such goods, meani ng some consumers are purchasing luxury goods not necessarily for their functional valu e but rather for thei r ability to convey 23 See Chapter 1 for an overview of conspicuous consumption. 24 This means that consumers are still utility-maximizing given an income constraint. 25 See Chapter 2 on Lancaster's Attribute Theory. 51


status. For the purposes of the Cobb-Douglas utility function, one could theoretically make "status" good s and all other attributes good x I posit here that "status" as an attrib ute present in luxury goods and it provides utility to a consumer (as an actual commodity would in the ne oclassical sense) and can be modeled as such using a Cobb-Douglas ut ility function where a status-concerned consumer spends a specific proportion of periodic income on "status." To be clear, by allotting a specific amount of income to status, and status being an attribute available in a variety of goods, the consumer with Cobb-D ouglas preferences isn't buying a specific type or quantity of goods but rather he or she is buying a good or group of goods which satisfies his or her predetermined tastes for "s tatus." As usual, the preference for status is subject to an income constraint. If his Cobb-Douglas utility function is like the one already mentioned above, where status consumption is always 1/4 of total income and all other goods are always 3/4 of income and the consumer's income is $10,000 per month, then each month the consumer would theoretically spend $2,500 on status-laden products, whether they be many or few, as long as they pr ovide the correct personal requirement of status allotment. If his income were to change say to $5,000 per month, then the consumption of "status" would decrease by the same proportion (h alf) to $1,250, which is still 1/4 of total income. Conversely, changes in price are equa lly as straightforward although the price of "status" is tricky to define. If the status in question was s ecured through only one type of good (where either one or more units of the same good were bought to satisfy the need for status), then the concept of price is the same as usual, where it is based on a per-unit basis of the good itself. However, if multiple goods are used to secure status, then a 52


change in one of their prices would certai nly change the consumption bundle although in what way may depend on other factors. A ssuming that there was another good which provided equal status and was less expensive, the consumer could simply substitute that good for the one which increased in price, in order to have the same level of status overall. Similarly, the price of all goods that convey status coul d systematically increase, in terms of a luxury tax or consumption tax. In America, luxury fashion goods are taxed at the normal sales tax rate of the county and state of purchase. However, a consumption tax has been proposed as an alternate way of raising revenue in lieu of the federal income tax (Bakija 2008). In Europe, luxury goods ca rry a VAT (value-added-tax) which makes their prices higher than they would be ot herwise. Whether the implementation of the VAT has significantly changed consumption of luxury goods is not clear. In any case, this is not the forum for that deba te and so I will leave it at that. III. Factors of Status To better understand the fact ors that alter preference for status, I posit here that although consumers are still utility -maximizing subject to an income constraint, status as an attribute is itself a function of several variables. Those include : conspicuous price ( Pc), number of other status consumers in the market ( n), cultural attitudes toward status ( c ) and income ( M ). A change in any of these variable s could change either what goods are purchased in order to procure status or the pr oportion of total income spent on status (as a 'good' in the Cobb-Douglas function). 53


Conspicuous price pertains to the price th at a consumer thinks others think he or she spent on a particular item. For instance, when a consumer finds a "deal" on an item of clothing or a pair of shoes, whether through a seasonal sale at a designer boutique or by purchasing at a factory outlet store (where pr ices are lower as the items on sale are usually several seasons behind or weren't big se llers at the regular stores), that consumer is theoretically the only one w ho truly knows the origins of the clothing or pair of shoes. If the item in question is conspicuous enough, say sporti ng designer logos or colors prominently, then others around the consumer who possess accurate market information, say the typical full-price price of the item, w ill think the consumer paid that full-price for the item and hold the consumer in some highe r esteem or respect because of the greater sum of money the consume has put into his or her personal appearance than he or she might have otherwise (Lichtenstein 1993, p. 242). Obviously, this example breaks down if the others are aware of the sale or deal (and therefore possess complete market informa tion), if they aren't aware of or don't care about the particular designer (and therefore hold the consumer in no more esteem or respect than they would otherwis e) or if the product in quest ion is in fact fairly common within the reference group and therefore not special or unique (Bagwell 1996, p. 349). Nevertheless, it is clear that conspicuous price plays a big pa rt in consumers' perceptions of status and their consumption of status-providing goods (Leibenstein 1950, p. 203).26 Just the sight of the twice-yearly sale at Nordstrom --where shoppers are frantically trying on shoes, looking to get a "deal" on a good whose real price and conspicuous price will differ considerably-should convince a ny nay-sayers of the consideration of conspicuous price by status-concerned consumer s. Later in this chapter, it will be 26 He said "conspicuous price determines the conspicuous consumption utility of a commodity." 54


necessary to briefly cover the cost of time concept in relation to consumers who go in search of "deals" where they try to minimi ze real price and maximize conspicuous price. Culture refers to a number of societal forces driving the popularity of luxury goods and the necessity of status consumption. One very powerful influence on one's culture, generally, is the prevailing attitudes in one's relevant reference group regarding the purchase of good and services in order to obtain status. If someone grows up among a wealthy clan, whether they be friends, rela tives or both, the personal taste for a certain level of status consumption may be higher than it would be otherwise.27 Otherwise, it isn't out of the question to also assume that popular media has a significant effect on a culture's collectiv e taste for status-bearing commodities and perceptions of which goods provide that stat us. Reality TV shows, which downplay any notion of scripting or product placement ce rtainly might weigh on the perceptions of some younger viewers who think that the Real Housewives of Orange County, a reality television show spun off Desperate Housewives, the ABC drama, is in fact representative of normal life for teens and adu lts in Southern California. They all drive BMWs and shop at boutiques for $300 jeans. Similarly, celeb rities and musical talents are virtually expected to dress a partic ular way and don themselves with designer fashion goods, which is like giving free advertising to the brands they wear In any case, cultural factors and the media that influence accepted popular culture certainly play into the taste for status. 27 Wong & Ahuvia (1998) have suggested that in cer tain cultural settings, one's clan has a considerably impact on attitudes about consumption for status reasons 55


Status is also function of the number of other status-seeking consumers in the marketplace as evidenced by the snob and bandwagon effects proposed by Leibenstein.28 If the consumer in question operates as a s nob in the economy, he or she may necessitate a greater level of status overall (i.e., greater taste) in order to di stance himor herself from the crowd of status-seekers who require comparatively less st atus. Or, instead of changing the share of total income dedica ted to status, the consumer may purchase different items which provide the same amount of status but which may be of higher quality or be less based in trends and fads For instance, the consumer may require a given amount of status which can be achie ved through quantity over quality of a certain type of good, say Gucci loafers, priced at around $500. However, if there are a significant number of others in the economy also consum ing the loafers in que stion, the product may lose its perceived comparative status valu e and the individual s nob consumer may choose to switch to another good (fewer in quantity) which provides the same level of status as the numerous popular items. This choice to use up the entire income allotment on say a pair of John Lobb loafers, which are priced starting at around $1,000 a pair regarded as being of considerable high quality, may turn out to be a better investment in the long-run anyway. Alternatively, if the consumer operates under the bandwagon effect, he or she may too increase status in response to others in his reference group increasing their own consumption of status-bearing luxury goods. As you can see, number of others in the market can affect both the taste and percepti on of status, depending on what scale is used (individual item or market in general). 28 See Chapter 1 for coverage of Leibenstein's three effects. 56


And the last variable that affects taste for status is income. Neoclassical theory suggests that as income incr eases, expenditure on all goods and services increases as well, although at varying rates. How income affects status consumption is not entirely clear. In some cases, it may increase as a resu lt of increases in income due to career achievement. Typically, career achievements are ba sed at least in part to personality and respectability in one's field of work. In many fields, including law, business and of course, fashion, there are expectations of a certain level of personal grooming and appearance and those expectati ons alone may force a consumer to increase his or her level of status consumption through purchas e of expensive clothi ng or ostentatious personal adornments (jewelry, watches, s hoes, etc.) (Chao 1998, p. 113). Clearly, there are plenty of settings where style of dress is irrelevant, however there may be an equal number of settings where success in busin ess may depend greatly on one's appearance. IV. The Evidence In other cases, an increase in income may simply increase a consumer's interest in luxury fashion items which happe n to convey status and which they happen to be able to afford at a higher income level (Dubois 1993, p. 40). Across time frames, it wouldn't be surprising to learn that many consumers only become concerned with status consumption when their incomes allow for such purchases to be made freely, and when they may feel the need to flaunt their recent increase in wealth. The research on the subject of luxury good consumption is murky since the most recent global slowdown in all areas of consum ption has not only affected middle-income consumers who have less liquidity day-to-day but also the more traditionally recession57


proof ultra-wealthy.29 There is evidence to suggest that status consumption is reduced but not eliminated when status-concerned c onsumers' incomes are reduced but not eliminated, allowing for the possibility that so me of their utility functions do in fact reflect a Cobb-Douglas preferen ce structure, although whether th at is consistently true across income levels is not clear. In the case of true Cobb-Dougl as preferences, it is possible that some consumers do allot a specif ic and constant portion of their income to the purchase of "status," an at tribute which is available in a myriad of goods, including luxury fashion goods, cosmetics, alcoholic beverages and many other categories. Despite this general uncertainty, there is evidence that in response to the recent change in cultural attitude towards status consumption (that during a recession it is seen as overly vulgar or dclass), that traditional status-concerned consumers are switching from more conspicuous brands and products to less conspicuous brands and products which may, in certain cases, be higher in quality and represent more of a long-term investment purchase instead of a short-term trend-fueled purchase.30 While countless brands are suffering the consequences of lower consumer confidence and lower consumption overall, sales at luxury brands, like Herms, a brand thought to generally reflect superior quality and timeless design, have been relatively steady.31 This phenomenon would support the theory that stat us consumption may drop in the aggregate as a result of lower income but individual co nsumers are still purchasing status, however they are doing so through more subtle, understated channels.32 29 Furman (2009) and Winslow (2009) are both news stories about luxury brands adjusting to the new economic climate. 30 An International Herald Tribune article citin g a switch from conspicuous to true luxury. 31 A Bloomberg article citing upgraded financial growth rating from Credit Suisse and an Associated Press article citing steady sales through first quarter of 2009. 32 A Knowledge at Wharton article citing new views on shopping and excess in America. 58


In this section I covered the normal Cobb-Douglas utility function, where the consumer is (in a simplified model) purchasing only good x and all other goods given an income constraint of M By the method of Cobb-Douglas, the consumer will allot fractions of his or her income to spend on good x and all other goods (the sum of which adds to 1) and which stays constant as long as tastes are constant Typically, we assume they are fairly constant over periods of time (Varian 2006, p. 35). Then, I looked at using the Lancasterian approach of attributes to posit that "status" is, for the sake of the utility f unction, a good which certain consumers allot a specific amount of their periodic income to obtaining. Because we have assumed the validity of the attribute approach, "status" is a quality that is found in a variety of goods and services, which a cons umer may mix to obtain a given level of status. Further, I asserted that "status" is a function of several abst ract variables, the measurement of which is often subjective. T hose were: conspicuous price of the statusproviding good ( Pc ), number of other status-concerned consumers in the market ( n), cultural attitudes toward status ( c ) and income (M ). I then gave empirically significant evidence to suggest the va lidity of these claims. In the next section, I will look at the status-driven c onsumer and his demand for a good as a function of both conspicuous price a nd real price using Leibenstein's Veblen Effect graph and make some conclusions about where many consumers fall on that graph. 59


Section 2 Real Price and Co nspicuous Price in Practice I. The Veblen Effect Revisited Building off of Leibenstein's Veblen Effect analysis, I would like to take a closer look at what he said were a good's two pri ces: the real price (Pr) and the conspicuous price (Pc). In his analysis, a consumer's demand for a good was dependent on both the real and conspicuous prices, although he assume d for the sake of simplicity that the real and conspicuous price were identical in highly organized markets where price information was readily obtaina ble. Assuming this, the Vebl en Effect could be more clearly differentiated from the price effect. In the more realistic case that they aren't always identical, Leibenstein claimed that at a lower real price relative to a higher conspicuous price, demand for a good would be greater (in total quantity demanded) than if they were identical. The graph of the Veblen Effect from Ch apter 1 is reproduced at the end of the chapter for convenience on page 74. In the diagram, each of the downward-sloping demand curves D^1 through D^5 represent different levels of market dema nd for different conspicuous prices. For D^1, each point on the curve represents market demand at a given real price with a constant conspicuous price. As the conspicuous pri ce increases, the market demand shifts out, creating D^2 through D^5. The Dv curve represents the locus of virt ual equilibrium points where real price is equal to conspicuous price. As already me ntioned, in Leibenstein's model, highlyorganized markets provide accurate price in formation which renders these two prices 60


equal more often than not. For his purposes of explaining the Veblen Effect, this was necessary. However, what conclusions coul d one draw if the market wasn't highlyorganized and price informa tion was more inconsistent? For this query, it is helpful to take a clos er look at the Veblen Effect diagram. In it, Leibenstein shows the effects of a price decrease on overall demand, still assuming real price and conspicuous pr ice are identical. In the diag ram, both prices dropped from P4 to P3 and total market demand fell from poi nt S to point R. The explanation is that with a decrease in real price (but not c onspicuous price), the quantity demanded would increase to point T, where consumers ar e essentially getting a "deal" on a good whose conspicuous price is higher th an its real price. However, in a highly-organized market, where both prices are identical due to accu rate market knowledge, demand would fall back to point E^3 (quantity demanded at point R) because the conspicuous value of the good is no longer greater than the real pri ce. As you can see, the conspicuous-price demand curve changed from D^4 to D^3. This example was simple and clean in order to demonstrate the Veblen Effect which explained upward-sloping demand curv es, a phenomena that tended to confound traditionalists as most normal goods have demand curves that are a negative function of their price. But what about a more realisti c interpretation of the market for luxury and status goods using this model? Are markets truly highly-organized and do conspicuous price and real price often fa ll in the same place? And what does it mean to be on points off of the Dv curve? 61


II. Points off the Dv curve Here, I posit that in many markets, no matter how modern or "connected"33 they are, consumers in the luxury good market are of ten operating in areas off of the Dv curve. In fact, the possibility of being at point E^4'34 is entirely possible given the convention in most markets of seasonal merchandise sales, special deals for VI P customers, discounts on items that never met sales projections, final-sale merchandise at outlet malls and employee discount programs, all of which re present opportunities to distance the real price from the conspicuous price. At point E^4', the conspicuous price is relatively higher at P4 (given by being on the D^4 demand curve which represents a cons tant conspicuous pric e of P4) but real price is at P3. The difference between Leibenstein's example and this one is that because the market is not highly organized and pri ce information is not as readily available, conspicuous price remains higher than real price so consumers operate on downwardsloping demand curve D^4 instead of downward-sloping demand curve D^3 and in turn demand more. All of this is keeping in mind that the good in question is a luxury or fashion good which provides status and fo r which the conspicuous price makes a difference to consumers. In any case, because knowledge of the re al price is often limited to those involved in the transaction (store cler k, sales associate, credit card company, and consumer), the likelihood of accurate transaction price knowledge, on the part of the rest of the statusconsuming public, is slim. If th e consumer is purchasing a te levision or major appliance, this transaction price is fairly irrelevant as those goods are not necessarily valued for their 33 This term is with regard to information technology and the dissemination of extensive product information over the internet. 34 This point was placed on the Leibenst ein graph by me, not by the author. 62


price so much as their functionality or techno logical capabilities. They might fit the more classic definition of a status good but not the modern version, which focuses more on brand and image (Mason 1998, p. 131). Similarly, a "deal" on a house or a car is noteworthy but rarely makes a significant dent in the total purchase price and repres ents little difference between real price and conspicuous price. However, luxury fash ion commodities as status-conveying goods are priced on a scale that is lower than auto mobiles or homes and they tend to have a significant mark-up as well35, meaning their original list price is very much reflective of brand image-associated costs, not necessarily costs of production. For that reason, "deals" can be had in many situations and high-priced designer apparel, accessories or shoes can be purchased for considerably less than their original retail price. Some of the opportunities for such deal-s eeking: outlet malls, especially at the two outside of New York City and Los Ange les already mentioned, which include outlets for fashion brands such as Chanel, Dior, Gucci, Prada, Bottega Veneta, Yves Saint Laurent, Tod's and Salvatore Ferragamo, among others. The prices here tend to be 30% lower than original retail and then they ha ve periodic merchandise-clearing sales as well, when goods can be had for as much as 65% off of original retail price.36 In Florida alone there are eight outlet malls including one just up Interstate 75 from Sarasota in Ellenton. At Prime Outle ts Ellenton, you can find Brooks Brothers, Polo Ralph Lauren, Off 5th Saks Fifth Avenue, Juicy Couture, Coach, Kate Spade and many others.37 35 Dana Thomas (2007) states that it can sometime s be as much as 13 times the original cost 36 A Consumer Reports article written about outlet-mall pricing. 37 This is my own information collected while vis iting Ellenton Prime Outlets and researching other Florida outlets. 63


Further, the second-hand market for designer goods and accessories has exploded over the last ten years, many of which market their used items as "vintage," as some items date back into the 1970s. Especially in larger cities where re gular consumption of high-priced fashion goods happens regularly, the second-hand ma rket is especially brisk, with new items constantly appearing and th e chance of finding something truly unique is much higher than in regular boutiques where everyone is considering the same sorts of shoes or the same kinds of bags. In "vintage" stores, prices can sometimes exceed the original price of the good, as the value of a dollar has ch anged over time (a $200 dress now is different from a $200 dress 30 years ago) or the good has simply appreciated in value and desirability. Otherwise, most s econd-hand stores price items well below original retail although prices vary depending on the store.38 In addition to physical stores where l uxury goods can be consigned and re-sold at a discount, there is another very popular place where many luxury goods find secondhand homes: EBay. The site started as a simp le way to sell unwant ed items via virtual auction and send them to a buyer anywhere in the world. With the right sidekick payment service (PayPal39), it gave a new meaning to virtua l garage sale and it was incredibly easy to use. Understandably, many have starte d entire businesses built around EBay, w hundreds of simultaneous auctions and auto mated payment and shipping services once the auction for a good is over. Considering the popularity of sec ond-hand luxury goods at physical stores, it was only a matter of time until all sorts of luxury fashion goods found their way onto EBay and into the hands of people who were looking for a deal. And on ith 38 This is my own information collected while visitin g various designer consignment stores in New York City and Sarasota. 39 PayPal is the EBay-owned online bank that allo ws users to open accounts, buy and sell on EBay directly from their PayPal account and transfer money to and from physical bank accounts. 64


top of the excellent bargains, there is no physical transaction beyond mailing door-todoor so there are even fewer people privy to the actual transacti on cost than in the traditional store setting. Another possible although much less common route of obtaining luxury goods at lower prices is through employee discount programs. Every brand differs on its policies about employee purchases but for Louis Vuitton, employees are barred from purchasing any newly-released item until it has been avai lable for 90 days, unless they want to pay full price for it, in which case they can buy it whenever they please. After the 90 days, most goods carry a 20% di scount although many seasonal items (goods which are available for a short time in limited supply and then disappear forever, only to be replaced by something different in style or de sign the following season) can be had at the end of the season for up to 90% off of the retail price.40 To a lesser degree, "deals" can also be found in the periodic ability of customers at department stores like Neiman Marcus a nd Saks Fifth Avenue to purchase items using "reward points" they have accrued on their st ore-branded credit cards. This doesn't make a huge impact on the overall price paid, cons idering the points only accrued with the purchase of numerous other high-priced l uxury items, although it can make a difference in the purchase of smaller items like wallets or sunglasses. At some point, there is a saving, however small it may be. Clearly, there is a parado xical relationship here. On one hand, luxury consumers and those that are concerned with status hold many luxury brands in high regard and consider their high, semiinaccessible prices a signal of their perceived quality and 40 I was unable to find confirmation of this from an official source but it is what I was told by a former Louis Vuitton Sales Associate, Xavier Lebron of Seattle, Washington. 65


status-bearing abilities. On the other ha nd, almost everyone, luxury shopper or not, prefers to get a better price on something which they are paying a large sum for and treat their personal purchase gap between real pric e and conspicuous price as either a closelyguarded secret or a boast-worthy finder's tale depending on who the audience is. It's as if, collectively, we endorse status consumption and the high prices that luxury brands charge for their goods because after-all, we want to keep that conspicuous price as high as possible, but quietly we also secretly seek out and search for good deals when they can be had, so as to get the best real price. It is because of this dual demand for status that the nature of the attribute is fairly tricky. The goods that provide status have demand that is largely based on their conspicuous price. As that goes up, demand doe s too, which is in line with the economic definition of a "luxury good." However, most consumers, especially those that have driven the brisk sales of many small, accessi ble luxuries at the bottom of the luxury ladder, base their actual buying d ecisions on real price rather than conspicuous price. As the real price drops, the willingness to purch ase (and actual purchase level) increases. Evidence of this dualism exists in any situation where, for a limited time or in a discreet setting, high conspicuous-price good s are available for much less. In any case, this potential to minimize real price while maximizing conspicuous price I believe is the central motivation fo r the hours of time spent shopping or browsing in person or online for a majority of luxury s hoppers who insist on some level of status or prestige but simply don't have the budget to a fford what they desire status-wise or prefer to seek out the best "deal." It is apparent to me, given this evidence of widespread dealseeking behavior, that we are often not on the Dv curve at all, but rather somewhere off 66


to the left of it. In the next section, I will briefly analyze this deal-seeking behavior in terms of the cost of the time spent looking for bargains and how that affects the real price faced by consumers. Section 3 Cost-of-time Analys is of deal-seeking behavior I. Pashigian As Peter Pashigian states in his 1998 Price Theory and Applications the "price" of some goods is not only the market price but must also include the time required for consumption (p. 143). By this he means that there are some goods that are particularly easy to find, purchase and consume...a cup of coffee for instance. On the other hand, there are some goods which aren't particularly easy to find, purchase and consume and in fact tend to require an extended period of searching, buying and consuming. An example of that might be a French-language textbook, which requires time to find the appropriate book for one's skill level and then the time to actually read the book, do the exercises and learn the language. Of course, these are ex treme examples and most people don't compare coffee to books, but it provides a clear idea of the principle of the cost of time. Pashigian goes on to say that althou gh all consumers must consider their opportunity cost when considering time spent consuming (instead of working), he points out that these opportunity costs will differ among consumers because there are some consumers who hold low-paying jobs and fo r whom the hourly opportunity cost of consuming is relatively low and other consum ers who hold very high-paying jobs and for 67


whom the opportunity cost is higher. There ar e also consumers who rely on interest and dividend payments for their pe riodic income, which is independent of work effort, making their opportunity cost very low ( p. 144). Pashigian gives an equation for a consumer's time constraint, where ( tx ) is time spent consumer good X, where ( X ) is the units of good X, where ( ty ) is time spent consumer good Y and where ( Y ) is the units of good Y: Time Spent consuming good X + Time Spent consuming good Y + Time Working = Total Time or: txX + tyY + Tw = T To that, he adds a revised budget constr aint which includes the wage rate ( w ) times time spent working plus non-wage income ( V ) which he assumes doesn't require a time commitment. That equation is: PxX + PyY = wTw + V This equation and the time constraint e quation are combined in order to determine which market basket of goods X and Y satis fy both the time and the budget constraint given a specific time worked (Tw ). First, the revised budget c onstraint is solved for Tw, then substituted back into the total time constraint equation to get the full-price budget constraint: (Px + wtx)X + (Py + wty)Y = wT + V This equation shows that the price of good X is the market price of X ( Px ) plus the time spent consuming X ( tx ) times the wage rate ( w ) in opportunity cost. The same is true for good Y. Then, all of that is subject to "full income" which is the wage rate times total time available ( wT ) plus non-wage income ( V ). In other words, total money 68


expenditure plus forgone income of consum ing goods X and Y must equal full income (p. 146). This equation and principle allows both consumers and firms to decide how much to consume of goods X and Y (consumer) and how much to produce and at what price level (producer). As Pashigian points out, so me firms may price relatively low but may be physically located farther away from "eas y-access" for the consumer or offer fewer "help-desk" type services, increasing cost-o f-time to consume. Alternatively, they may price their good higher but include many fri nge services which make the time spent consuming the good (or repairing it) much smalle r. In other words, the opportunity cost is smaller. This is a key concept with regards to consumers who seek deals for luxury goods but might spend more time seeking out the pr oduct than someone who is willing to pay full price. Typically, outlet malls are located in outskirt areas, either just off of major highways or within driving di stance of major metropolitan areas The land is cheaper and rents are most likely much lower than in urban areas where the demand for store-front space is high. The travel time spent getting to the outlet location ce rtainly plays in, and the fuel costs for a car or fare costs for public transport may play into the cost of time as well. The evidence of this relationship betw een highand lowprice goods and their convenience of consumption can be found in almost all markets for almost all goods. Some automobiles slightly undercut the competition in price but skimp on the perks of ownership, like free scheduled maintenance or a free rental vehicle during servicing. This might be just one difference betw een a $14,200 Kia Spectra and a $15,350 Toyota 69


Corolla41, both of which are safe, dependable sm all Asian sedans but which may vary greatly on service and fringe perks. Curiously, in order to truly undercut the competition, Kia offers such perks as a 10-year, 100,000 ne w-car warranty (one of the best in the industry) and no-questions-asked vehicle buy-back for customers who lose their jobs shortly after purchase of a new car, both of which are atypical of a budget car company.42 Of course, each model and brands' respective im ages, resale values, target consumers and other characteristics may also vary greatly and more than make up for their market and cost-of-time differences, but that is another debate entirely. Another example is airline flights. Esp ecially in Europe, where many flights are quick hops between close by cities and many student travelers are tight with money, one can find tickets between countries for as little as 1 euro. However, many of the airports served by discount airlines like Ryanair and Easyjet require more hassle-laden arrangements and frequently charge fees for luggage and other serv ices. In the end, the real price of a budget airline ti cket is only marginally smalle r than the real price of a regular ticket which probably requires much less "to-do" in order to consume it. When I lived there I consumed both discount tickets and regular ti ckets and I much preferred spending the extra money on the easier of th e two, preferring the decreased hassle and less time spent getting to and from the airport. In any case, the luxury g ood market for fashion and status goods certainly takes into account the cost of time, whether the goods be at a flagship boutique in the center of town, where sales assistants are available and willing to help and products can be easily ordered and shipped directly to one's home or if the goods are at an outlet center far from 41 Both product prices were take n from each brands' respective websites, accessed March 17, 2009. 42 This information was taken from the Kia Motors website, on March 17, 2009. 70


town where the atmosphere is disorganized and few sales assistants are available and willing to provide a superior level of service. One could argue that much of the original retail price of a good is in fact its fringe benefits and perks, one of which is conveni ence of purchase. If you are willing to spend the greater amount of money, then the goods are easily accessible either online or instore, and satisfaction is mo re likely. Otherwise, the goods are considerably cheaper but the budget-conscious consumer must spend time getting there and looking for the product, where satisfaction isn't necessarily gua ranteed. I think that the 'hassle and effort' aspect of bargain shopping is considered by those who prefer it over paying full retail but I'm not entirely sure that those paying full retail realize that the higher price they are paying is reflected in their saved time as well. Pashigian continues his analysis by speci fying the difference between an increase in a consumer's nonwage income ( V ) and a change in his or her wage rate ( w ). These changes impact the full price budget constraint in different ways as an increase or decrease in nonwage income simply shifts the full price budget constraint out or in but does not change the slope (or the opportunity costs of consuming good X or Y) because relative full prices are unaff ected (Pashigian 1998, p. 151). With an increase or decrease in the wage rate however, the slope changes as the total opportunity cost of consuming good X or good Y will have changed. The analysis of these changes is straightforward and insightful in determini ng exact shifts in consumption of one good over another, but for our purposes it is not necessary so I will not cover it. In this section, along with the preced ing two sections, I interpreted luxury good 71


consumption for the status it often conveys in a neoclassical manner using Cobb-Douglas preferences, working further with Leibenstei n's Veblen Effect analysis and I briefly considered of the real price faced by c onsumers given the cost of time component. Traditionally, the consumption of luxury goods was seen by some as irrational as the goods were consumed for reasons other than direct utility and their market demand curves were sometimes upward-sloping. Hopefu lly, I have succeeded in identifying some ways in which the behavior of consuming l uxury goods can be seen in a more traditional manner. Next I will relate some of these ne w perspectives on luxury good consumption to the marketplace in real terms. 72






Chapter 4: The Market Section 1 Pre-Recession I. Recent Situation The market for luxury fashion goods is vast. Most Western societies have cultivated a collectiv e that is hungry for brand names and the images and attributes associated with those brands. Unsurprising ly, producers of such goods have responded accordingly. They have built glossy stores, e quipped their staff with matching uniforms, put their branded (and often l ogo-laden) items in these stores, and marketed to every segment of the "luxury-buying spectrum." Fo r some, luxury goods are "accessible." They are rare, marked occasions and represent a treat...often a fulfillment of a dream (Dubois 1995, p. 72). These are the newest luxury consum ers, who fuel the profitability and longterm staying power of many luxury brands. They buy the lower-priced items, like ties, scarves, wallets or sunglasses but they often buy multiples over time and come to cultivate a "collection" of items which bear the same brand name (p. 70). Incidentally, these are the items which have some of th e highest profit margins and which are the "bread-and-butter" daily business for many luxury brands. At the other end of the spectrum are the more typical, aristocratic luxury buyers who have always purchased luxury goods and fo r whom differentiation from 'the masses' is more necessary and challenging than ever before. For them, custom-made items, items specifically lacking logos or vi sible brand names (now seen as vulgar), and investment in high-end jewelry or timepiece s is the standard fare. 75


There are brands that cater to each set of consumers. Coach, the American leathergoods firm, often prices at th e bottom of the luxury market, despite offering many of the same perks of more expensive brands. It is therefore often referred to as the "affordable luxury brand."43 To increase visibility in areas of squarely middle-class wealth, Coach operates stores all over the United States, often in suburban shopping malls where other similarly-priced brands may be found. In Florida alone, there ar e 30 Coach stores, all carrying its signature line of leather and canvas handbags, wallets, belts, sunglasses and other accessories, most in the range from $80 to $500. Other brands like Louis Vuitton, Gucci, Prada, Dior, Marc Jacobs and many others serve as the middle of the luxury ma rket. They price high enough that the majority of shoppers do not purchase frequently but th ey do have items which are "affordable." Prada produces nylon handbags and accessori es which range from $250 to $800 and leather handbags which range from a bout $900 to $3,000. Therefore, most average consumers cannot walk in the store and walk out with a $2,000 bag; however, they have found popularity with consumers in the uppe r middle class, with household incomes above average, probably ranging from $120,000 to $250,000. And at the top of the luxury goods ladde r are the brands that represent true, unattainable, rare luxury. These include Herm s, Cartier, Chanel, Bottega Veneta and several others. Available only in cosmopolitan cities with large wealthy populations (e.g., Chicago, New York, Los Angeles, Miami, A tlanta), they range in price from $1,000 to more than $100,000. Made of crocodile skin from Australia and adorned with diamonds set in platinum, the Herms Birkin bag (nam ed for actress Jane Birkin) can cost up to 43 This information was taken from a conversation w ith Felice Schulaner, ex-Coach executive and New College alumna. 76


$150,000. Of course, those days are rare when someone comes in to buy such a bag; however, one of its standard leather bags av erages about $7,000, which is itself a pricey item for almost any consumer, not to mention most middle-class luxury consumers. And parallel to price differences are differences in status-bearing abilities, as conspicuous price is closely related to level of stat us. Generally, a $1,000 Louis Vuitton handbag will convey less status than a $7,000 Herms bag but more than a $300 Coach bag, although to the mass of consumers, they are all notably status-bearing. What has occurred is a segmentation of the luxury goods market that goes beyond the typical "expensive watch" or "expensive bag," verses a cheap watch or cheap bag. Even within the realm of goods, there is a hier archy, an ordering of brands that classifies them by type of consumer, type of good, status-bearing abilities a nd a number of other variables. My Emporio Armani watch retails for $250, which certainly isn't cheap by most standards...however it holds little cachet or status value when I am in the company of people wearing Rolexes or Omegas, which cost upwards of $2,000. The point is that status is a relative attribute and re lies largely on the goods consumed by one's significant others. In any case, luxury goods and their gl obal status-providing abilities, no matter what end of the spectrum they occupy, have seen a widespread gain in popularity since the late 1980s. Status brands now consume the minds of many peopl e, across generations, across socioeconomic backgrounds and across cultures and countries Anything that you can purchase in order to instan tly demand attention and demand st atus is what sells. What was Calvin Klein, Tommy Hilfiger and GAP of the 1990s has beco me Juicy Couture, Coach and Polo Ralph Lauren of today. 77


Further, the popularity of high-end, hi gh-priced European brands like Louis Vuitton and Gucci is certainly evidenced, at least in part, by the elaborate market for counterfeit handbags and accessories donning the Louis Vuitton or Gucci label, but produced illegally in Asia or South America, and sold at a fraction of the price of the authentic item. The counterfeit market is supported primarily by those who recognize a brand's ability to convey status and prestige but who cannot afford such authentic items at their list price or ev en at discounted prices.44 The counterfeit market is by no means representative of the actual luxury goods market in te rms of which goods are most popular or what motivates people to purchase status goods; however, it is interesting to note the counterfeit market's parallel growth to the real market in the past several decades,45 in order to illustrate the universal ity of status-seeking behavior through the purchase of luxury goods (or good copies of them) across inco mes and other cultural and social variables. II. Market Theme The theme that has emerged from such an explosion of offerings from luxury brands and their popularity in all aspects of life is that like any other indu stry, retailers and designers are in the game to make mone y. And they make lots of it by aggressively expanding availability in free-st anding stores and department stores as well as through online outlets. Further, using advertising and collaborations with popular musicians or celebrities that may appeal to their most promising market (young people with current or 44 For more information on deal-seeking behavior, please see previous chapter. 45 For further details on the counterfeit industry, see Kattoulas (2002). 78


future high incomes), most luxury goods brands have a virtual cult following among their most frequent buyers.46 LVMH (Met Hennessy Louis Vuitton)47, the largest purveyor of luxury goods in the world, owns and operates a handful of luxury brands and sells them in as many markets as possible. Louis Vuitton is the largest and most well-known brand under the LVMH umbrella, followed by Marc Jacobs, Ce line, Dior and Loewe, all of which sell similar types of items (handbags, shoes, wa llets, accessories). Not only are there some 400 Louis Vuitton stores all over the world, often in only the capital city of a country, but there are online sales sites and a vast array of secondhand and discount retailers, most notably EBay. With profits of 3.628 billion Euros for 2008 (LVMH 2009), LVMH surpassed the second-largest luxury goods corporation, PPR Holdings, by almost 100% (PPR 2009).48 The Gucci brand, along with seve ral others, are owned by PPR and represent its main source of revenue. The fi nancial position of corporate control, high sales, high profitability and overall wild suc cess is analogous at most other luxury brands as well. This success hasn't solely been a product of increased sales. In most cases, luxury brands, under the direction of publicly-held49 corporate keepers, have cut costs and sought less antiquated methods of production by vertically integrating all operations, from design to distribution, thereby increas ing profit margins. Prada now produces many of its items in Turkey instead of Italy, wh ere wages are lower, and on machines rather 46 The best way to understand the sense of having gained entry to an elite club by purchasing luxury goods is to log onto and view some of the threads started by members, displaying their collections of merchandise or speculating about upcoming luxury products. 47 For further details on the company, see Berner (2004) 48 PPR had profits of 1.721 billion Euros for 2008, PPR Annual Report 2008 49 This is important because publicly-held companies are accountable to shareholders for consistent increases in profits, whereas fami ly-owned or privately-run busin esses are less at the mercy of investors. 79


than by hand, which can be costly and tim e-intensive. Louis Vuitton no longer produces all of its goods in France, but rather has factories in Germany, Spain and the United States.50 In order to cut costs, Va lentino produces many of its men's suits in Egypt where fabric is cheaper and labor is much cheaper. And, there are a handful of companies who, very quietly, produce authentic goods in discreet factories in China.51 Of course, Chinese workers probabl y produce a product that is perfectly acceptable in terms of quality and attention to detail; however, the pr oblem lays with the legacy, image and status-value of many luxury brands. Most of the brands' images are based on European know-how and time-te sted methods of production, among other things. The shifting of production to other local es or using machines rather than human skill would inevitably tarnish th e image of most luxury brands, and for that reason they are understandably secretive and subtle about changing the details of production of their goods. In any case, the luxury goods market has shown itself, as a colle ctive, to be more similar to most other industries than it is different. The producers of luxury goods are still meeting a demand for items which convey status52, although whether they are responding to desires or creating them ( la Galbraith) is unclear. Regardless, they must balance their expansion and extra-normal profit-seeking beha vior with their reputations, their images and their heritage. This dilemma is much like the one facing many automobile brands, which must fight to remain competitive and 'fresh' while also cutting costs in any way possible and entering into lucrative but risky partnerships with other brands. Anyone with 50 Although none of these locations provide drastically cheaper labor than France, Louis Vuitton does save money on shipping and transit costs of distribution 51 Solid evidence of this is understandably scarce, however Dana Thomas does provide anecdotal evidence in her book How Luxury Lost Its Luster (2007). 52 Most luxury goods also fulfill other attribute preferences as well, not only status. 80


an eye on the automotive world will tell you that the partnership between Chrysler and Daimler-Benz was anything but mutually bene ficial. Mercedes' image and quality was noticeably contaminated while Chrysler benefite d greatly from the expertise in safety and refinement that the Daimler engineers possessed. It seems as though the companies whic h have stayed truest to their founding principles and have consistently delivered ex actly what they've promised are those brands that have been family owned and/or completely independent since their inception. Porsche has dabbled with Volkswagen on projects over the years but has remained independent, and to this day remains strong. Herms, the venerable French leather-goods company with an equestrian history, re mains family-run and owned and has seen relatively little change in its production method, its availabil ity and its customer base. It too remains financially healthy, despit e the recent downturn of global spending. In my opinion, brands like Louis Vuitton are overexposed. They are constantly on the verge of virtual saturation in the market. This has been achieved by alienating certain older, more established and subtle-status customers with its appeals to the more numerous young, artistic, and logo-craving consumers. And, because the brand is available in almost every c ountry in the world, not to me ntion almost every large or medium-sized city in America53, its prestige value is in escapably devalued by some margin. The same goes for the Gucci and Coach brands as well as department stores like Saks Fifth Avenue and Neiman Marcus which carry high-end names like Prada, Balenciaga, Chanel, Di or, Burberry, etc. 53 In Florida alone, one of its biggest markets, there ar e 16 stores. 2 in Tampa, 2 in Orlando, 5 in Miami, 3 in Palm Beach County, 1 in Naples, 1 in Fort Laud erdale and 1 in Jacksonville. The same general trend goes for department stores like Saks Fifth Avenue and Neiman Marcus as well as the Gucci and Coach brands. 81


III. Cultural Consequence As a consequence of this saturation of brand names, concentrated wherever there are any intense pockets of wealth (either pe rmanent or seasonal), it seems that luxury consumers are in a frenzy of labels and brand names and in turn, are rarely satisfied with the "status" provided by a give n brand for very long. For that reason, some consumers are constantly looking to move up the luxury goods hi erarchy, for their attention is held for a short time by any one brand. Dubois and Paternault (1995) offered one perspective on brands' strength. They said that there is a "dream factor" which can be measured based on the awareness of a brand, the purchase rate of that brand, a nd the dream value of that brand. They asked 3,000 people to answer three questions, which ad dressed the three dream variables. They found that the relationship between awareness and purchase of a brand was fairly strong (people usually buy brands they know). Als o, the relationship between awareness and dream was strong. In contrast, the relations hip between purchase and dream was much more tenuous (Dubois 1995, p. 72). In order to look more closely at purch ase and dream value, they performed a partial correlation analysis to remove the "contamination" of awareness. After this function, they found that there was a negativ e relationship between purchase and dream, indicating that the le vel of diffusion of a luxury bra nd adversely affects its "dream" appeal (p. 72). This finding was consistent with the idea th at luxury brands are desirable because they are rare and unique. When they become ubiquitous, they lose their luxury character. Depending on a consumer's percep tion about the diffusion level of a brand 82


among other consumers, he may feel that the st atus (or lack thereof) provided by a brand is not sufficient for his needs. In any case, the luxury g oods market isn't solely cultivated by the companies themselves. There seem to have been several societal changes which may have encouraged the great growth of the in dustry over the past several decades. IV. Demand-Side Factors One possible contributing factor on the demand side for such goods, aside from the expansion of the availability on the suppl y side, is the availa bility of credit to consumers in a wide range of incomes. Acco rding to the U.S. Census, the number of Americans holding credit cards, the purcha se volume of all cards, and the total outstanding credit card debt all increased in the period from 2000 to 2006. Cardholders jumped from 159 million people to 173 million pe ople (some with more than one card), purchase volume increased from $1,242 bill ion to $1,950 billion, and outstanding debt increased from $680 billion to $886 billion.54 Sullivan (2009, unpub.)55 states that debt and credit (the ability to incur debt) are impor tant aspects of the social mobility process (Sullivan unpub., p. 1). Although she makes no explicit mention of status, one might surmise that because social hierarchies are often based around status (or lack thereof), that those in the pursuit of status may also use debt and credit in order to gain status and in turn, gain upward social mobility. To give further perspective, the St. Louis Federal Reserve Bank estimates that total consumer credit has increased from $1,541.3 billion in January of 2000 to $2,571.4 54 This information taken from the U.S. Census website, 55 Teresa A. Sullivan is an accomplished sociologist and provost at the University of Michigan. Although her paper is unpublished, she has published several books and articles in the past. 83


billion, adjusted seasonally.56 That is an almost 67 percent increase in only nine years. Incidentally, with the recession looming, the Fe d also showed that to tal credit is down in February of 2009 from the previous month by $7.4 billion, indicating that credit is being reigned in. It will be interesting to see what this figure does over the next few months. Although credit may not have been the enti re cause of an increase in luxury good sales and availability, it certainly may have been a contributor. The increase in credit may, however, be a result of increased house hold income and wealth in the United States over the past two decades. Gross Domestic Product (GDP) per capita increased from $28,429 in 1990 to $38,290 in 2007, in constant year 2000 dollars. Similarly, disposable income per capita grew from $21,281 in 1990 to $28,649 in 200757, also in constant dollars. Moreover, median household ne t worth increased from $70,800 in 1995 to $93,100 in 2004, thought to be largely an effect of increased home values and increased home ownership. According to Gordon, almo st 70% of American households own their own home (with some equity in that home ) and from 2000 to 2006, there were consistent increases in home prices (G ordon 2009, p. 513). He also menti ons low interest rates as keeping the savings rate low and consump tion high, although I will not address that relationship any further here. My point in mentioning these figures is only to provide a rough picture of the kinds of changes that occurred over the past two decades. With a general increase in credit availability and use, a general increase in income and a general increase in wealth, it is plausible to assume that spending of all sorts, including luxury spending, has increased to some degree. 56 This information can be found at: http://res red2/data/TOTALSL.txt 57 Information also from the U.S. Census website. 84


What you may be asking yourself now is...yes but, what about after this recession? How will the market have changed? In the next section, I will outline some of the assertions I have made in the previous chapters, what kinds of implications they suggest for the market in general, and then how the data has shown some early trends for the luxury goods market in the bleak economic climate of this year, which has affected not only blue-collar middle-class people, but al so those at the very top as well. Because of a wide-reaching recession and a wide range of products and price points sold under the "luxury goods" umbrella, the luxury goods market will be uniquely affected. Those who normally bolster the sales of luxury goods even during recessionary times (the rich) are having a tough time that is by no means equal bu t still considerable in relation to those who classically must cut extr avagant purchases like high-price handbags or accessories during recessions (t he middle class). Section 2 Post-Recession I. Implications The various theories, models, and asse rtions of the past century and the assumptions made in this paper help to il lustrate that conspicuous consumption and consumption that is status-motivated are bot h significant areas of study in the field of economics and notable aspects of everyday life in America and most other industrialized countries. Veblen popularized the idea of conspicuous cons umption (purchasing above and beyond functional utility to signal wealth) and others have collectively indicated that status is a desirable outcome of most exampl es of conspicuous consumption, at least with 85


regards to luxury goods and services. Given this body of research and my assumptions that status is a desirable attribute and some consumers' preferences for it may be stable and well-behaved (in some cases), what ki nds of implications for the luxury goods market and the economic study of such consumption do these assertions and new perspectives suggest? Status, although simultaneously salient a nd fleeting in daily consumer choices, seems to be a fairly consistent motivator of the purchase of brand-name items. Visibility is a necessary prerequisite to status purcha ses, but those "visible goods" range from the $18 tube of Chanel lipstick to the $3000 Prada metallic deer-leathe r handbag. In either case, there is a decision being made that examines the alterna tives and, assuming a certain persuasion of the consumer about his or her preference for status, the choice may be made to pay a price premium or purchase a good that is visible to others and in turn, conveys not only wealth and ability to pay, but also status and prestige. Using the Lancasterian model of utility, wh ich claims that the attributes of goods provide utility rather than the goods themse lves, most people would probably agree that status is an attribute pres ent in a variety of goods and to many consumers (although not all), status is desirable and adds to the overall utility level of a good. Some examples of status-bearing goods might be: women's co smetics, personal furnishings, clothing, accessories, shoes, jewelry, timepieces, f ood, cars, cell phones, although I am probably forgetting plenty of others. In other words, almost anything that is visible and can be easily identified by relevant others can be turned into a status-bearing commodity. Working off of Lancaster's or iginal assumptions, I said that status, as an attribute, is available in a variety of different goods. I thin k this is evident, at least in one respect, 86


by the clustering of "luxury shopping" in ma lls and streets around the world. These are areas where you can purchase a va riety of goods and services, all of which are luxurious, prestigious and likely to c onvey status. On New York's Madison Avenue, you can be measured for a couture evening gown, upgrade your travel luggage to something more stylish and sturdy, purchase a new timepiece that has better capabili ties and matches your personal style more closely, and even make extravagant travel arrangements or purchase a new car. Incidentally, many of these tight-kn it retail communities have had gaping vacancies in their facades in the first months of 2009, an e ffect of decreased sales and expectations for the future. On Madison Avenue, the New York Times reported in February that retailers were quickly fleeing fr om "sky-high rents." As a result, the street is pockmarked with vacancies, something unheard of on the "gold coast of retailing" (Pristin 2009). Although little has been empirically studied with regards to status and its presence as an attribute in most luxury goods, most pe ople who have ever browsed in such a mall or street or spent time thumbing through a Neim an Marcus catalog might agree that status is intrinsic in many items available to the wealthy. There are many more than a handful of goods which are visible to significant others, in fact one mi ght say that almost half of all consumer goods are in fact visible, at one point or another, rather than private.58 That assertion leaves ample opportunity for generic goods to become segmented and differentiated based on brand name, and for status to be even more stratified as an attribute. 58 Even the sheets on one's bed, which are typically a very personal, private choi ce, are visible, at some point, to a maid, a spouse or a potential romantic partner. 87


Further, the overall level of status gl eaned from a group of items may be higher than the amounts gleaned from consuming thos e items separately. In the case of luxury goods, having a high-end business suit, expens ive shoes, a designer handbag or briefcase and a luxury timepiece probably provide more st atus overall to their wearer than those goods would if they were consumed separate ly, one at a time. As mentioned in the previous chapter, consumption constellations were proposed in relation to social roles; specifically, the resear chers studied those who self-identify as "yuppies" and which brands they chose to consume, out of a number of product categories. Similarly, I don't believe it unreasonable to say that status may be the goal of such groups (yuppies especially). So in the purs uit of status, while being yuppies," those consumers may choose products which enhance their status utility and which may range in product type from a car to a style of furniture to a brand of handbag. In that sense, status may be the strong est common attribute of a group of goods, to the point where, like Madison Avenue of New York or Rodeo Drive of Beverly Hills, all purveyors of goods which provide status in so me measure will group together to form inclusive physical areas where you can purchas e status. In So Paul o, Brazil, there is a gated, access-restricted department store that specializes in goods a nd services that are pure luxury (i.e., status), where the simple act of being there and shopping there means something, indicates something about one's stature in the community (Thomas 2007). 88


II. Daslu Daslu, it is described, is where shopping meets society meets childcare and daily errands. The multi-story building, in the heart of the city, has mini in-store boutiques (larger than a kiosk but smaller than a full store) from almost every popular luxury goods brand in the world. Louis Vuitton has a place there, so does Gucci and Dior. Further, family shopping is encouraged, as there ar e boutiques for children, boutiques for men (several car dealerships exist within the complex as well) an d a number of restaurants and cafs. All of this is under one roof, much lik e a mall, although Dana Thomas, in her visit there, described it as more of a gigantic, rambling home, complete with cozy resting places and clerks who know each customer by na me. She goes on to say that most of the So Paulo elite shop there regularly, so seeing a friend or two while there is quite usual, even expected. Although this is a small representative of the luxury buying populace and certainly doesn't reflect "accessible" luxury, th e idea of a place like Daslu is an evolution of the luxury shopping malls of today in most other areas of the world. Luxury brands are typically grouped together in m odern malls and streets, but as far as restricting entrance or treating the experience more like a trip to a friend's home rather than to a public space (where children should still be watched closely and you can't just lounge in your bra while waiting on a clerk), that is a new idea. What a place like Daslu seems to indicat e is that just by being there, you are affirming your status as a consumer. Because you have gained entry, or you have been there enough times that clerks know who you are and ask about your family, you have already gained status. The actual goods you purchase are of little overa ll relevance, other 89


than for your own taste and enjoyment. Some might say that Daslu is the "status store." You go there, interact and browse, and by leaving with bags in hand (a successful shopping trip), you have gained all the status yo u need, at least to t hose relevant others who care. The goods in those bags ar e of little importance in the end. The same logic that applies at Daslu could be utilized in understanding the American obsession and fascination with th e experience of shopping in general. All shopping malls are placed on a continuum of pr estigiousness and attract people not only for the stores they offer, but for the expe rience of being there that provides status qualities. Shopping malls are no longer simply th e place to purchase status, they are part of the status, a value-added aspect of the purchase experience. How else might you explain the popularity of placing high-end restaurants, bars, sa lons and other services in shopping-dominated complexes? Despite the niche example of Daslu, I sti ll feel that my original assertion (in Chapter 2) that, across groups of horizontal equity, there are two choice sets occurring. One, they are choosing to consume status or to not consume it. In the case of Daslu, to visit the store and interact is to make the decision to gain status, and then the choice as to what goods to purchase that will provide that status returns the consumer back to simple personal taste differences about what is attr active and agreeable. Of course, one must buy something because to purchase nothing would be a violation of the status-purchase unspoken social contract among the wealthy and in order to maintain status, one must continue to purchase over ti me, not just once or twice. Chapter 2 was largely meant to simply affirm the idea that Lancaster's Attribute Analysis is especially helpful in viewing conspicuous and status-motivated consumption. 90


I posited that status was indeed a desirable attribute and that alt hough it is important as a marked aspect of many luxury goods, it is al so fairly complex and can be altered by changes in advertising or other percepti on-shifting actions. Chapter 3 was about how status, as a good, could be viewed in a more neoclassical sense. I stated that some consumers have shown that they have well-be haved, normal preference s for status, and in some cases, Cobb-Douglas preferences, where they tend to spend th e same proportion of their income on status, across income changes. III. If We Assume C-D Preferences... If this assertion is valid, and some status-conscious consumers do have CobbDouglas preferences for status (in my exampl e, a consumer spent 1/4th of his or her monthly income on status and 3/4ths on all other attributes), then an economic downturn and subsequent decrease in income should have several effects. Save for a change in tastes, which I will address shor tly, a decrease in income should precipitate a decrease in a consumer's spending on status, although it will decrease at a c onstant proportion as income decreases (maintaining true CobbDouglas preferences). In any economic downtown, I would say that those who see stat us as essential part s of everyday purchase decisions are more likely to have Cobb-D ouglas-type preferences and continue to purchase status, just less of it. Evidence of that has certainly been observed in the past several months, while many consumers have dropped out of the luxury goods marketplace altogether, others even those who aren't ultr a wealthy, have continued to purchase, just less often or on fewer items. 91


Alternatively, a consumer trying to preser ve his or her level of status despite a drop in disposable income may simply seek different goods that convey a similar status level but whose real price may be lower. In other words, the consumer may switch from a suit purchased straight from the boutique to one that can be found on sale elsewhere. In a general sense, those who must cut costs but mainta in a preferred status level may also, by the logic of Friedman's PIH, see a recessionary decrease in income as temporary. The PIH claims that a consumer operating under this assumption will maintain his or her overall consumption level, regardless of a smaller income, whether by drawing down on savings or utilizing one or more credit accounts. That is, until this new lower income becomes permanent or semi-permanent, a case where savings and credit will not last forever and overall consumpti on will have to decrease by some margin. Certainly Sullivan mentions that just as many use debt and credit to achieve upward social mobility (perhaps by purchasing status -laden products), many also use debt and credit to maintain a level of social sta nding (perhaps by continuing to purchase statusladen products) after a decrease in income or household wealth (Sullivan unpub., p. 1). Considering that both income and hous ehold wealth have both seen dramatic decreases already, with further drops possibl e, it is possible that luxury spending may indeed be in serious jeopardy. Nonetheless, I do feel that there are consumers who have stable, Cobb-Douglas-type preferences for th e attribute status and will continue to purchase luxury goods through this recession.59 59 Status, treated as a good, is therefore a normal good, at least in some cases. 92


IV. Other Changes Aside from changes in income, wealth or prices, I claimed in Chapter 3 that the taste for status is itself a function of several variables. Those were: conspicuous price, number of others in the market, culture a nd income. The first two refer to changes in consumers' perceptions of status and the latte r two refer to changes in consumers' tastes for status. With regards to conspicuous price, t ypically labels do not greatly alter their pricing scale in response to a recession. Most luxury bra nds avoid excessive discounting because they feel that it devalues the bra nd name and opens them up to criticism about arbitrarily high initial prices. Evidence of the delicate nature of luxury discounting was apparent this past Winter season when the Saks Fifth Avenue stor e in New York City regularly slashed prices by up to 70%, ofte n times on goods that were also available elsewhere, at less reduced prices. Consumers were left thinking why they considered paying the original price in the first place, if prices could be so slashed and the store could still make a profit. In any case, it wasn't a happy situation for many designers and brands and Saks has faced retaliation from some of the brands it carries. In this particular downturn, despite relu ctance to follow in Saks' footsteps, many designers and brands are revising their pric ing strategy for the Spring-Summer and FallWinter seasons of 2009 in response to less l uxury spending during th e last quarter of 2008 and the first quarter of 2009. In some cases, prices may not fall greatly but brands are placing greater emphasis on less expensive items instead of highlighting their top-ofthe-line goods, as usual. Alt hough this collective decrease in full (conspicuous) price is 93


rare and unlike the typically ir on-clad luxury sector, I highly doubt it will greatly impact the perceived status va lue of most luxury goods. If conspicuous price is important en ough to enough luxury consumers, then the perceptions of what goods provide adequate status may change as a result of this downturn. Buyers may flock to the few brands which will maintain st atus and prestige by not discounting. Chanel, for one, has increase d prices since the r ecessionary pressures have ensued, rather than decreasing prices.60 And Brioni, a well-known Italian suit brand, has recently introduced a suit made of vicuna pashmina and qiviuk (a ll rare fibers) that tops out at $43,000. Clearly they believe that there is still a market for full-priced, premium items. Whether these moves will have a net positive effect on sales at either company is yet to be seen. Maybe those br ands which refuse to discount or have increased prices may attempt to balance out in the end by discounting more than usual during sale seasons, when any discounting is seen as more acceptable to a brand than cutting regular-season full-price prices. Perception of and taste for status may also be impacted by the number of others in the market, which may change as result of a decreased incomes and household wealth. If there are fewer consumers spending in l uxury boutiques overall, then those remaining consumers may sense either a greater or lowe r status value in a gi ven product, based on whether they operate as snob or bandwagon consumers. One group may feel that the status value of a good has increased since fewer people are buying it, and the other may feel that because fewer are buying it, it is actually less desirable. 60 This was a rumor on The Purse Forum all through the Fall of 2008, supposed to take effect November 1st. Whether it actually did I'm not certain. 94

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A more obscure possibility is that tast es for status may also be impacted by number of other consumers. Those operat ing as bandwagon consumers may drop out of the market or decrease their tast e of status overall, even if they still have the ability to consume a similar level of status as they had before. In this case, those who felt the need to 'keep up' simply for the sake of keeping up may feel a decreased pressure to conform and to purchase status, depending on their reference group. Inversely, they may feel an equal and opposite pressure to shy away from status-seeking consumption while conforming toward "recessionchic"-type spending. Popularizing the concept of "recession ary spending" and turning it into a fashionable trend certainly hasn 't been outside the minds of those writing for Vogue or Harper's Bazaar in recent months. Instead of attempting to ignore the problem that plagues almost all of its readers, the public ations that influen ce trends and spending patterns have chosen, at least to some de gree, to make fashionable the problematic situation of remaining beautiful and stylish, with less disposable income. Stores about "an entire spring wardrobe under $500" and "how to shop smart at Goodwill" have taken the place of more ostentatious magazine features in recent months. Income is a literal and figurative factor of the desire for status. With greater income, one can purchase more status and with greater income, the taste for status may also increase. In a recession, it would seem unlikely that decreased income would precipitate a decrease in th e taste for status. I suppos e it varies depending on one's environment and relevant others. In some cases where status is very important to begin with, a decrease in income may have an ambi guous effect. Some may see it as reason to maintain status (to maintain reputation) and ot hers may see it as reason to increase status 95

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consumption (to downplay any signs of financial distress). However, those scenarios may be true for only a minor subset of status-conscious buyers. The majority of those consuming status may see decreased income as a good excuse to lower the importance of status in everyday consumption, especially wh en the decreased income is seen a common problem within a horizontal social group. Another changed factor of the taste for status is the cultural attitude toward it. Although status will likely rema in a desirable attribute in goods (as long as people seek social mobility), recessionary times may result in a lower overall cultural taste for conspicuous and status-driven consumption. In the extreme case, status may be looked upon poorly by those who have had to greatly alte r their spending habits as a result of the changing economic climate. Others, who still crave status but would like to minimize their social damage risk from purchasi ng luxury goods during a recession, may simply shift their consumption of status to different goods or services. Within a brand, they may utilize alternat e modes of status-procurement that are less conspicuous and less ostentatious, such as switching from a logo-covered bag to a non-logo-covered one. They may also switch brands entirely, maybe by switching from Chanel to Bottega Veneta. Both are highly-re garded European brands with great status and prestige. The former, however, is well know n to be expensive and effectively "loud" to relevant others, whereas the latter is considerably more understated and "under the radar,"61 although it is sold at a si milar price point to Chanel. 61 This is often because Chanel utilizes a well-rec ognized interlocking-C lo go, frequently attached prominently to the front or side of a Chanel bag. Bottega Veneta, alternatively, has no trademarked logo and is only known for its signature woven leather motif which is consistent acros s its product offerings. 96

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V. Luxury Brand Changes If this sort of switch were to occur fo r a significant number of consumers, then one might expect brands like Herms, Bottega Ve neta and Tod's to see at least less of a decrease in sales or even a leveling off of sales volumes (no drop but no increase). For Herms, many have already reported on its cons istent financial stability and strong firstquarter sales for 2009. The verdict on the ot her two brands' finances is unclear, although the Gucci Group already predicts losses for 2009, which includes the Bottega Veneta brand. For those established brands produci ng high-end luxury leather-goods, I believe that bankruptcy or insolvency is a far o ff threat. Most of them have enjoyed brisk business over the last two decad es, although especially recentl y, and they are unlikely to fall into extreme peril for some time, save for any extraordinary circumstances. Most of them will maintain their status and prestig e value and will continue to provide those attributes to luxury consumers. How each brand is perceived in its status-bearing abilities post-recession is unclear. Alternatively, I predict that many recen tly-established brands, ones blatantly attempting to cash in on what was truly a fren zy during the last ten years, may have a greater likelihood of dissolving. A host of new brands have popped up in the past several years and many of them are st ill relatively small operations Those are the brands which may feel the pinch more than ever, as they ha ve little heritage to build upon and represent only a vague sense of investment, qualities that are inherent to the success of many wellestablished, truly timeless brands and products. 97

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With regards to my section about conspicuous price and real price often being very different, I think that th e recession of this year may have an ambiguous net effect on these two prices. As firms discount their full-price prices, some may see a downward shift in conspicuous price (although I doubt it wo uld be significant). There may also be even greater discounting for sale merchandise available post-season, further distancing these two prices. Outlet malls may see a surg e in business, although evidence of that is yet to be seen. Certainly in some cases, ot her methods of increasing the distance between the real and conspicuous price ha ve been employed by consumers. The local television news station (S NN6) recently reported on the greatly increased business of the local shoe repair, just in the last several months. People were bringing in their old, worn-out shoes rather than purchasing ne w ones, to save money. In turn, they were paying about $100 to get their old shoes re-soled, cleaned and polished. As the cobbler remarked, "it's like getting a brand new pair of shoe s, only you've already broken them in." In my opinion, by utilizing his services, you've also given yourself a boost in the price others' think you've paid for a new pair of shoes th at are really just reconditioned old shoes. Consignment shops and vintage stores may also see an increase in business, although it is too soon to tell. Consumers have the possibility of distan cing real price from conspicuous price for goods by visiting outlets or repairing items instead of purchasing new ones; however, I feel that the cost-of-time analysis highlight ed in Chapter 3 may provide further insight into the effects of the new economic situation. For many consumers, namely those at the upper end of the income scale, deal-seeking be havior typically proves too costly, usually in terms of the opportunity cost of time. There are a great number of young people, 98

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lower-income people, even retired people who find that they forgo little else in order to spend time visiting outlet malls or searching online for the best deal on a product, to whom there is a fairly small opportunity cost In my opinion, there are more consumers in the latter category than in the former, and that is what drives businesses like EBay and However, in this tougher economic situation, there may be several opposing effects in the deal-seeking area of consumer behavior. First, there may be more people overall looking to purchase goods with a high co nspicuous price at a lower real price by patronizing online retailers or spending more time pi cking over sales rather than simply paying full retail price. Alternatively, there may only be a temporary glut of discounted items from which to choose from, while residual stocks from 2008 are slowly sold off. In response to projected lower sa les volumes, many luxury pr oducers have reported that they plan to cut back production for 2009 orde rs, meaning there will be less overall stock, less will go on sale at the end of the seas on and there will be fewer "deals" to find. If enough consumers simply don't have the money to pay full price (because of lower incomes) nor the time to spend searching (because they are looking for jobs!), then the mismatch in supply and demand may repeat itself, and further cuts will be made for 2010. Again, there is a parallel between the luxury goods market and the automobile market. Most new cars are sitting on the lot unsold or unleased, desp ite aggressive sales pitches and low financing rates. As a re sult, brands are cu tting production and streamlining offerings for 2009. As a result, ove rall stock will be lower, meaning fewer cars going onto the used market. Unsurprisi ngly, many used car lots have seen an increase in prices, as the demand for cheap, re liable used cars is higher than ever before. 99

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The same process will likely occur for luxury goods, and those operating pre-owned luxury businesses will likely see an increase in demand. VI. Overall Market Changes Of course, I know that the car busin ess isn't exactly like the luxury goods business. However, they do show simila rities and for many people, both product categories represent significant purchases th at require more weight and consideration before making a choice than other purchases. Specific adjustments in the market, in response to the economic climate of this year, are likely and predictable to some ex tent. However, the recent uncovering of great corporate greed and executive disregard fo r those less fortunate and less powerful may have an even more fundamental impact on the way consumers see luxury. The luxury market is (appropriately) associated with ultra-wealthy consumers, often including successful financiers and other business figures. It also happens to be a lucrative market, in itself, for ambitious tycoons and business -men and -women to undertake risky ventures and capitalize on the market's often universa lly high profits; it is therefore closely associated with the finance world on several levels. And, because much of the source of the worldwide economic troubles originated in some of the largest financial intermediaries, the luxury goods market has suffered a particularly damaging blow. What we may see is a rejection of the at titudes of the past several decades with regards to fashion and luxury goods. It is no longer about expl oitation, supernormal profits, global diffusion or reaching every segment of every market. The years that luxury brands spent expanding their offerings and availa bility, all in the name of potential higher 100

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sales and higher profits, may certa inly come back to "bite them in the butt," as they say. Already, some brands have pulled out of stores that they only just recently opened. Stella McCartney, Dior and Alexander McQueen have closed stores in Moscow as a result of the global recession, stores they only just celebrated opening w ithin the last two years. Further, the associations and images of l uxury brands may be what is most at risk. Those that have shown arrogant disregard fo r their own heritage and core customers, those that have attempted to stretch their already thinly spread capabilities to provide even more product categories and lines, and those brands that have effectively been schizophrenic in self image may have r eason to be most worried. From a business standpoint, any of those characteristics may be damaging. Aggressive investment, especially in riskier markets, can be a great liability in times of uncertainty. Similarly, the lack of a strong, agreeable brand image could also spell risk for some luxury brands. When the times are tougher, people stil l want to spend money purchasing goods that provide them with desi rable attributes and which ma ke them happy. However, what is the likelihood that a luxury consumer would continue to purchase goods which are deemed overly 'trendy' or items from a brand th at doesn't base itself in classic, timeless design? Certainly, for a period, a trendy item will provide an adequate level of status for a (still) status-conscious luxury consumer. But a timeless pi ece, such as a Valentino red dress or a black Herms Kelly bag (or even something custom made by a commissioned artisan here in America), may prove to be the stronger, more responsible, more appropriate purchase during a time of uncertain ty and general distas te for ostentation. Investment items, those that will retain va lue and good looks for years to come could be the stalwarts of the next few years. 101

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I recently heard a story on National Public Radio (NPR) about a man who has studied the link between popular music rhyt hms and current economic situations. He found that in times of uncertainty or mass financial suffering, people prefer songs that have uniform beats, whether they be fast or slow, as long as they are uniform. He said it creates a harmony that is agreeable to people who have lots of other disagreeable aspects of their lives. Inversely, during times when the economy is doing well and the fear of unemployment or insolvency is low, pe ople prefer music beats that are more unpredictable, switching from fast to slow or slow to fast, within the same song. He cited the recent hits from artist Lady GaGa, a pop ar tist with fast-beat songs, as being popular, at least in some respect, because of their harmonious rhythm and the global economic uncertainty most people currently face. Obvious ly, this has little to do with luxury goods; however, I feel that the same logic may a pply to spending patterns. People prefer to purchase something predictable, something they can trust will be enjoyable. My point here is to say th at the shift may be from fast luxury that is ever changing and somewhat irresponsible to luxury that is slower and more constrained. People are disillusioned with corporate greed and exploitation of resources and ostentatious, conspicuous luxury is in bad taste; people want something they know will prove a solid investment rather than something fleeting and temporarily fashionable. The shift may occur throughout this year and the following years, taking with it some of the less established brands and rewarding some of the less exposed brands. To sum, perceptions about which goods convey status may change as a result of the global economic downturn. Howeve r, I feel that a change in tastes is more likely with regards to status. Some may feel that it is no longer nearly as desirable...those people may 102

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choose to consume fewer status-bearing goods, which includes luxury goods. Others may see it as an opportunity to gain status in different places, like in goods which are timeless and elegant rather than fleeting and unsophist icated. And, there may be a point at which the ability of those seeking status to greatly separate the conspicuous price of a good from the price they pay (the real price) is no longer viable, as producers' stocks will decline considerably in the coming year or years and there will be fewer discounted items during sale season to satisfy the demand. Conclusion I. Thoughts At this point, the overarching principal th eme is that further research of status consumption is necessary to make more pr ecise claims. Although much has been said about a behavior that is no longer anomalous in everyday life, there has been relatively little concrete evidence of consumers' tr ue motives for purchasing luxury goods and how their perceptions and tastes change from season to season. Classically, the act of purchasing an expensive product that is no more functionally useful than a lower-priced alternative was deemed irrational or counterintuitive. Further, many found that although it was common of royalty and the super-wealthy, purchasing products simply to display wealth and ability to pay was outside of the realm of economically exp licable behavior and limited to a small contingent of consumers. Veblen gave the act a name: conspicuous consumption. Economists of the time didn't attempt to integr ate such behavior into their models, and 103

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only after fifty years did Leib enstein give the Veblen's cl aims some serious horsepower. After dissecting the umbrella concept of c onspicuous consumption, Leibenstein had three 'effects' which he claimed could explain some of the seemingly i rrational behavior of consumers. They were: the bandwagon effect, the snob effect and the Veblen effect. All three were proper models which made room for the unorthodox claims that individuals' demand curves were reliant on and could be influenced by others' demand curves. About fifteen years later, Lancaste r shook up the conspicuous consumption literature by claiming that goods themselves di dn't provide utility to the consumer, but rather it was the attributes that the goods possessed that gave utility. Using his method of measurement, utility could be mapped differently so as to account for minute differences in products and brands which of ten (in real-life) mean the difference between a purchase and a bypass. In the modern context, conspicuous consumption through the purchase of luxury fashion products is an attract ive and available means to convey wealth and ability to pay. Awareness of their conspicuous price is hi gh and with the use of brand logos and symbols (and accurate market knowledge), they can be easily identified as something notable or special. To take wealth display a step further, luxury goods are also a useful means to convey status. In our society, a college degr ee is no longer unique, incomes in the middle and upper classes are escalating and there is a growing set of socalled "new-rich;" the need to stand out and proclaim a certain status or prestige is omnipres ent. This pursuit of status has allowed luxury brands to mass market and mass produce "status" by making their "accessible" products endlessly availabl e to the willing purchasers. Consequently, 104

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almost all of the major luxury fashion brands, from Coach to Louis Vuitton, have expanded and reported enormous growth and prof its in the past ten years, owing much to the burgeoning middle-class and those below them, who attempt to emulate the higher social stratums of the middle and upper classes. Using the models put forth by both Lancas ter and Leibenstein, this behavior can be further examined and analyzed. In this pa per, I posited that "status" is an attribute present in almost all luxury products, from leather goods to sunglasses and cosmetics to footwear. It is intrinsic to the brand value and profitabil ity of many luxury companies. Further, it is a greatly desirable attribute, es pecially in cultures like our own, and adds to the brisk demand for and sales of luxury goods. I also proposed that status, treated as a good, may have stable, well-behaved preferences for some consumers. In some cases, they may be Cobb-Douglas type preferences, where status maintains a consta nt proportion of income, whether income is large or small. A consumer with Cobb-Douglas preferences for stat us may be one that finds status to be an indi spensable part of everyday life. For those in social and professional settings that require a certain st yle of dress or decorum, there may be more stable preferences for status across income fluctuations. Although the current eviden ce isn't conclusive, there is some basic proof to suggest that as income decreases for those already consuming status, that status-type expenditures decrease by some similar propor tion. Although the goods that provide status (luxury goods) may still be treated as economic luxury goods, where demand increases as income increases at a ratio greater than one, most consumers pay more attention to real price (rather than conspicuous price) when making actual pu rchase decisions. Further, 105

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because the market for status and luxury goods has widened and now includes consumers from almost every level of income and b ackground, status expend iture may be treated more often as a normal good, meaning any chan ges in income may impact the purchase of status in the same direction. Because of the indeterminate and often s ubjective condition of "status," I also put forth the idea that status is itself a function of several variables: number of others in the market seeking status, a person's income, th e conspicuous price of the good in question and the cultural attitudes toward the cons umption of luxury goods and the desire for status. All of these factors affect how stat us is perceived in goods and how tastes for status may change over time. Unfortunately, the measurability of these aspects across groups of consumers may prove more diffi cult than economists are accustomed to because any consumer may weigh these vari ables differently or perceive status differently from another consumer. Nonethele ss, general conclusions may be made using correlation analyses or observing ex tra-large groups of consumers. Whether status is sought by the ma sses may depend on cultural or other qualitative factors, not unlike other attri butes whose desirability may depend on such factors, like uniqueness and individuality. In many Asian cultures, the need for individuality is less emphasized than in We stern cultures, where identity is more often based on achievement rather than lineage or social roles. In our culture, shameless display of status is often seen as a critical part of showing that you've "made it" in life. It is th erefore a frequently desired attribute and one that can be found in goods that are accessible.62 Because of this ease of entry, the market 62 Other status-bearing products like cars, houses and other things require greater commitment and investment and are not as easily purchased. 106

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for luxury goods has expanded and draws in all kinds of people from varying economic situations and incomes, not only the super wealthy. Although there will always be wealthy consumers who purchase luxury goods ou t of necessity, the larger portion of the luxury-buying crowd are those who desire st atus for upward mobility purposes. They may seek deals and comb the various end-of -season sales in order to secure their conspicuous status. However, the taste for status in our cultu re may collectively change as a result of a worldwide economic downturn. Some status-c onsumption is seen as ostentatious and wasteful, as the goods purchased are often of little practical use and may be discarded for something newer in a short time. As a resu lt of an economy with greater unemployment and financial hardship, the changed connotat ions of status-consumption may affect a measurable shift in the l uxury goods market. Consumers may shy away from products that prominently display logos and prominently scream wealth while gravitating to those that are appreciably more understated. Some may say that the market is making a shift away from "accessible" luxury back to "tru e" luxury, where the rightly status-laden products are those that aren't obvious and ar en't loud. As I mentioned in the previous chapter, some brands that are appreciated for their continuing excellence of construction may see a leveling of sales (rather than a drop like most other brands). Shipman (2004) proposes an interesting c oncept. He says that there may be an ongoing shift among the truly prestigious from 'w asteful' physical capital to 'tasteful' cultural capital. He presents several reasons why this is the case. First, material excess has declining legitimacy. By this he means that in many cases, the wealth needed to achieve such material excess may not have been gleaned through honest, hard-working 107

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means (p. 280). If this is the case, then the display of wealth by those seen as undeserving may not be received positively by significant others. Another reason he proposes is that conspicuous consumption is increasingly vulne rable to taxation and financial attack. He claims that taxing the goods whose utility lies in status could improve social justice and economic efficiency. Therefore, cultural capital may be a more exclusive way to signal status (p. 281). To the truly wealthy and prestigious, the shift from waste to taste gives them an upper hand in an area that is not easily bought. Shipman also mentions that "those who have got rich quick have an understandably lo w tolerance for the time and tuition needed to gain cultural accomplishment" (p. 279). In any case, Shipman sees a shift that downplays the easily bought status goods and emphasizes the more time-consuming status experiences and cultural cap ital. If this is th e case, then the luxury goods market, as is, may see an even more drastic change in the future. II. Future Research In writing this paper, I found that a lthough many of the theo retical claims of people from Veblen to Shipman are often visible in everyday life, there is still a dearth of conclusive evidence which precisely pinpoints the behavior in the luxury goods market and the movements which may occur in the future. I would find it useful and exciting to further study luxury goods in the Lancasterian model, surveying respondents about what sorts of attributes they pe rceive to exist in luxury goods and which characteristics are more important than others. It would also pr ove fascinating to correlate those answers to variables like income level, cultural background, urban verses rural setting and level of 108

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market knowledge. An empirical investigation of the stat us-motivated purchasing decisions made by consumers, in the luxury handbag category, along the lines of the study done by Chao and Schor, would be useful and could bett er strengthen the views of this paper. Unfortunately, the study by Chao and Schor was successful in identifying only one possible reason for consumption of branded goods because it was based on items that have fewer intrinsic qualities to diffe r upon. A tube of lipstick only has so many characteristics: color of lipsti ck, color of tube, texture, wear ability, brand name. Luxury handbags, however, have both brand differen ces and extensive aesth etic and functional differences, and those may be harder to separate. Despite this challenge, I think that what might be truly intriguing would be an investigation of the "dual choice sets" that I proposed in Chapter 2. How do luxury consumers consider their experiences in l uxury boutiques and how do those experiences affect their overall perceptions about the goods and the attributes pr esent in those goods? And, one might ask whether all consumers who are concerned with status, across income levels, participate in both "d eal-seeking" and "full-price pl us perks" shopping modes. Do those even at the very top of the mark et attempt to distance real price and conspicuous price? My final suggestion for a further st udy would be one where status-driven consumption is examined across product cate gories, not just luxury goods. Do consumers regularly partake in consumption of branded pr oducts in basic categories and if so, what else can be said about those consumers or a bout culture in general? Are there consumers that are selectively brandconscious and only purchase br anded, status-bearing goods in 109

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particular categories which they find more visi ble or important to their significant others? Is our society so fixated on status that as time goes on, there will be fewer categories where products are free from branding and free from status considerations? The answers to these questions could further solidify th e research on status consumption and provide even greater insight into the changes that have occurred in the past and the changes that will occur in the future in the luxury goods market. 110

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