Selling conspicuous goods to status-seeking consumers

Abstract

We model how status-seeking consumers signal their wealth through conspicuous consumption while interacting with social contacts and what optimal pricing strategy the firm, which sells conspicuous goods, should adopt to maximize its profit. In the model, we assume the consumer heterogeneity in two dimensions: product quality and social status. Then, we fully characterize how consumers' behaviors vary under different parameter conditions by demonstrating the perfect Bayesian equilibria in the signaling game. After that, we find that the firm's tendency to choose the optimal price and the primary targeting consumer types depends on the difference in tastes for quality between the upper and the lower classes. In all cases, an increase in the lower class's taste in quality leads to an increase in chances for the lower class to make purchases. However, if a taste in quality of the upper class increases, the firm is inclined to set the higher price to exclude the lower class when the difference in tastes for quality between the two classes is significant, but the firm tends to set the medium price to include consumers who aspire strongly to social status among the lower classes when the difference in tastes for quality are modest.