Conspicuous consumption

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History

The theory of conspicuous consumption was first put forward by Thorstein Veblen.

Definition

Conspicuous consumption refers to consumption/spending on good and services that is done, not primarily for the intrinsic value of these goods and services, but rather, primarily as a way of displaying income and wealth.

Conditions for conspicuous consumption

The goods are generally highly valued by society

Since the goal of conspicuous consumption is to display wealth or income, conspicuous consumption is seen most for goods whose high value, or high cost, is generally recognized by society. This may include precious metals, large houses, swanky cars, or collector's items. In addition, charity goods may also be highly valued by society (for instance, named endowments to charitable and other non-profit institutions).

The consumption is conspicuous

For conspicuous consumption to be effective, it is also necessary that the fact that the consumption/spending occurred gets known to others. For instance, buying high-priced diamonds is not enough -- they also need to be worn or showcased. Similarly, buying a large house is useless unless other people know about it. Similarly, named endowments are more conspicuous than anonymous unmarked contributions.

Thus, conspicuous consumption tends to favor those goods and services that can be displayed easily, and it is done in forms that can easily be displayed.

Costs and benefits of conspicuous consumption

Conspicuous consumption entails costs and benefits over and above the usual costs and benefits associated with consumption.

Benefit and cost of conspicuity to the consumer

In addition to the benefit from the good itself, the conspicuity, fame, and other positives that accrue to the consumer add to the consumer's private benefits. For instance, buying and wearing diamonds may make the consumer feel more respected and admired by peers and others.

Conspicuity can also have its costs to the person. For instance, the person may be a target of envy, planned thefts, and various forms of animosity.

External costs and benefits

Others who see the conspicuous consumption may be affected either positively or negatively. They may be affected negatively in the sense of envy or inferiority. They may be affected positively in the sense of feeling proud of the achievements or wealth of a peer, or inspired to attain a similar level of wealth.

Related types of goods and similar effects

Veblen good

Further information: Veblen good

The Veblen effect refers to the effect where, for certain persons and in a limited price range, the price-elasticity of demand is positive -- in other words, an increase in price leads to an increase in demand. Goods for which such an effect is observed are called Veblen goods. Conspicuous consumption provides an explanation of the Veblen effect. If, for a good, purchase of the good is an indicator of status, then an increase in the price (if widely known) may lead to an increase in the associated status and hence make the good more attractive.

Snob and bandwagon effects

Further information: Snob effect, bandwagon effect

The snob effect is an effect whereby an increase in the demand for a good by other people reduces a person's demand for the good, since it is now treated as a common or mass good. The bandwagon effect is the opposite, where, the more other people want a good, the more valuable the good becomes.

While there are many possible explanations for these effects, conspicuous consumption offers one possible explanation. The snob effect may be observed where the conspicuous consumption is to display one's high status, and demand for the same good among lower status people reduces the high-status appeal of the good. The bandwagon effect may be operational when the increased demand comes from people of high status, hence increasing the appeal of the good to display status.

Positional goods

Further information: Positional good

A positional good is a good where the value is solely based on the relative ranking for possession of the good. For positional goods, there is the possibility of an arms race, where everybody tries to have more and more of the good, without any net benefit accruing to society. If people view status as a zero-sum game, or strictly as one based on ranking, conspicuous consumption is simply a part of the arms race for a positional good.