Running to Keep in the Same Place: Consumer Choice as a Game of Status

Abstract

We investigate consumer choice where individuals care not only about the absolute values of consumption, but also about their status. This is defined as their ordinal rank in the distribution of consumption of one good. In such a situation, the consumer's problem becomes strategic as her utility will depend on the consumption choices of others. In the symmetric Nash equilibrium of the resulting game, each individual spends more on visible consumption than in the absence of a concern for status and has lower utility. Treating status endogenously allows us to analyze how exogenous changes in the distribution of income can affect individual choices. In a more affluent society, individuals spend a higher proportion of their income on the positional good, which leads to a reduction in utility at each income level. In a more equal society those with lower incomes spend more on conspicuous consumption and are worse off. We go on to analyze externality-correcting consumption taxes and subsidies.