Conspicuous Consumption

This article features an interesting mix of Economics and Psychology, it explores the notion of conspicuous consumption and why it is spreading like an epidemic within the UK.

Firstly we should define ‘consumption’ as the act of using up a resource, so consumption effectively will be the purchasing of goods and services.

The theory of conspicuous consumption suggests that people buy certain goods in order to enhance their social status.

The conspicuous consumption theory suggests that individuals purchase goods not because they needed them but to display their wealth and status.

Classic examples of items that may be purchased for the purpose of conspicuous consumption is Rolex watches, Porche cars and ostentatious jewellery such as diamond rings.

The theory goes on to suggest that with these expensive purchases, a person’s satisfaction increases the more of them they have and the less of them other people have.

Demand for some of these items increases as the price goes up. Unlike Giffen goods, however, which must be inferior, these goods must signal high status.

A willingness to pay higher prices is to advertise wealth rather than to acquire better quality. A true conspicuous consumption good, therefore, should be noticeably higher quality than lower priced equivalents.

If the price falls so much that it is no longer high enough to exclude the less well off, the rich will stop buying it.

There is much evidence of this behaviour in the markets for luxury cars, champagne, watches and certain clothing labels.  A reduction in prices might see a temporary increase in sales for the seller but then sales will begin to fall.

Conspicuous consumption is more common among the newly acquired wealthy individuals, looking to make an impression in wealthy circles.

Today most people associate conspicuous consumption with highly paid celebrities who have made their name in the music or entertainment industries, with sporting starts, city traders who could earn six figure bonuses by being successful on the stock market, or big lottery winners.

However the likelihood is that in more limited ways many people engage in acts of conspicuous consumption without fully realising it, even if they are not particularly wealthy or their lifestyles are not defined by luxury.

Sometimes consuming the messages that are encoded into the commodities through design and logo might be more important than the thing itself that we buy and make use of. For example, a thing might be part of a brand.

There is a difference, for example, between a burger bought in a small mobile food unit at the side of the road and a burger purchased by a recognisable chain, even though what we do with them is the same, the message associated with the brand of the burger being consumed can be different.

It is therefore important to consider conspicuous consumption when making purchases, are you overpaying for items because of an internal desire to enhance social status?