Self-Serving Altruistic Consumption and International Prices

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Self-serving altruistic domestic consumption arises when foreign consumption contributes to the domestic utility of consumption. This is particularly the case when consumption saturated economies with excess capacities vie to increase their employment and expand their foreign trade to maintain their competitive advantage. As a result, the traditional presumption that consumption preferences are “selfish”, underlying traditional economic assumptions may be misleading. When the self-serving altruism is combined with economic reciprocity (embedded in countries’ preferences), globalization is a “win-win” economic development. Such situations have both consumption and price implications, depending on countries’ preferences, their cost structures and their trades. This paper is based on a Cournot model for two countries, each with a utility function of both countries’ consumption. An “altruism premium” is defined by the price one country pays to expand consumption in another. We assume both consumption demand and supply sides including trade between these countries and use a Nash conjecture to determine countries’ inverse demand functions (implying that consumption in one country takes for given consumption in another when deciding how much to consume as a function of price). On the supply side, optimal global supply is shown to lead to prices that are linearly related and a function of the countries preferences. We show that under certain circumstances there is no purchasing power parity (PPP), while in others, when prices are calculated net of their global marginal costs, there exists a PPP. Specific examples outlining the implications of such situations are considered.