Competition in a Status Goods Market

Abstract

Consumers value status goods because of the impression status-product ownership makes on other consumers, and this impression depends on the actual distribution of ownership in population. Explicitly modeling consumer value of status products as coming from the information the product ownership conveys to other consumers, the authors show that a status-product manufacturer can benefit from a competitor's cost reduction because of the competitor's price reduction associated with it. In other words, they show that two status products that are (imperfect) substitutes in the consumer utility function may be complements in the profit function. As a consequence, competition could lead to higher prices than the optimal ones under monopoly ownership of both products. The authors confirm the assumptions that consumer value of a status good depends positively on the proportion of desirable type among owners and negatively on the proportion of the desirable type among nonowners in one experiment. Moreover, they find empirical support for the positive effect of a price reduction of one product on the demand for the other product from another experiment.