Status Goods and Vertical Line Extensions

Abstract

Conspicuous consumption of status goods signals consumers' status and grants status value to them. In this article, we examine how firms selling status goods make vertical line extension decisions when they take consumers' status preferences into account. Analyzing an incumbent's vertical line extensions when it faces a threat of entry, we find that status preferences can make unprofitable extensions profitable. Moreover, without status preferences, an incumbent can introduce line extensions to crowd out the competitor's profit and deter entry. However, with status preferences, introducing line extensions can increase the competitor's profit and attract entry. We also find that incumbents should introduce downward extensions when they are monopolists and upward extensions when they face competition from lower-quality entrants. As the cost of entry increases, incumbents should change from introducing upward extensions to introducing downward extensions. As consumers' status preferences increase, incumbents introduce downward extensions under a wider range of situations.