Conspicuous Consumption

In mainstream macroeconomic theory, the consumer is an actor who can choose from at least three possible options: make investments in the economy, save a portion of their disposable income, or consume available goods on the market. While both savings and investments in the economy are crucial, in this blog, we would like to concentrate on consumption – specifically, conspicuous consumption.

There is hardly any human behaviour that isn’t influenced by social interactions, and consumption is no exception. One would expect purchase decisions to be based solely on the utility derived from a given article, i.e. the intrinsic value of it. Yet, a simple observation can reveal that it is the extrinsic value that determines the majority of consumption choices. The value derived from the consumption of an article comprises a signal value that evinces wealth and social status to the observers. It is of no coincidence that two articles – such as a Casio and a Rolex watch – satisfying the same need, are valued differently. This phenomenon, the desire to display social status which guides consumption decisions, has been coined as conspicuous consumption. Evidence from sociology indicates that the need for conspicuous consumption is so high, that it becomes the prevailing decision driver after the subsistence level. The vanguard of this theory, Thorstein Veblen, believed that “No class of society, not even the most abjectly poor, forgoes all customary conspicuous consumption”. A quick glance around will reveal that Veblen was right: it is by no means an uncommon spectacle to find a relatively low-income individual working with the utmost effort to purchase the latest iPhone or a designer bag.

Status goods and opportunism – an experiment

While there are many experiments where consumption choices are at the center of investigation, there is one in particular that is of interest to us. Damianov (2009) created an experiment where subjects had to make budgetary decisions on the division of consumption goods. This experiment is exceptionally great and has been devised to be interpreted in economics classes; however, it heavily involves behavioral economics.

In the experiment, subjects have a $1000 budget constraint, and they need to make a decision on whether to buy standard consumption goods, or “status goods”. The two goods have different functions: in economic terms, consumption goods are the ones which objectively increase one’s utility – if you choose to buy $1000 worth of consumption goods, then your base utility will equal 1000 (but it’s not your ‘final utility’).

Status goods, however, is where it gets interesting: investing in these goods – let’s say, jewelry – will measure your social ranking in society. There are four options:

1) If a person has the highest investment in status goods, s/he becomes the ‘Elite’, and his/her consumption utility gets multiplied by 10;

2) If there is more than one person with the highest investment in status goods, they become the ‘Upper class’ ; their multiplicator is 4;

3) If one invests $100 less than the ‘Elite’ or the ‘Upper Class’, one will become ‘Middle class’, and their multiplicator will be 2;

4) Finally, if one’s investment lags behind by $200 or more than the ‘Elite’ or the ‘Upper Class’, one will become ‘Lower class’, and their multiplicator will be 0.5.

Students then have to make simultaneous choices on their consumption. For example, if there are two players, and the first invests his money 50-50, and the second person invests only in consumption goods, then the first student becomes the elite (his utility becomes 500 x 10 = 5000) while the second student will become lower class (thus their utility is 1000 x 0.5 = 500). What would be the rational choice to make while budgeting?

If the whole society would only invest in consumption goods, everyone would be upper class, thus they would achieve the highest social utility possible – this choice being Pareto-optimal. However, this would also give the option to certain people to ‘go rogue’, and play an opportunistic turn by investing into status goods, making them the Elite. This move, however, starts a vicious circle: everyone starts to invest more and more into status goods, turning the whole game into something similar than that of the problem of commons. This experiment provides a great example on how a supposed social maximization can be achieved and in reality, how fragile it really is.

Instagram – the very definition of conspicuous consumption

As we have delineated, conspicuous consumption satisfies the need to communicate the relative standing of an individual, i.e. the social status, to the general public. Subsequently, which platform can be better to achieve this purpose than Instagram, with over 1 billion users, to display the possessed status and image? It is not an uncommon phenomenon to see pages such as ‘Rich Kids of Instagram’ posting pictures with helicopters and race cars in the background. Research conducted by Krause et al. (2019) validates this assertion: in the devised model, the driving factor behind 43% of Instagram posts was found to be predictable by conspicuous consumption.

Conclusion

The role of conspicuous consumption in our daily lives is often indiscernible; yet, it is one of the primary forces that directs our purchase decisions. The effects of conspicuous consumption can be drastic, since it necessitates individuals to consume continuously for displaying their social status to others, creating a vicious circle that has already trapped Millennials.

It should be remembered that Veblen introduced this in 1899 – at an era where conspicuous consumption was much harder to have a grasp on. Today, more than 120 years later, his theory is more relevant than ever.