Conspicuous Consumption and Game Theory

Overview

In this paper we intend to draw a comparison between Thorstein Veblen's theory of Conspicuous Consumption and Arms Races, or the Hawk-Dove game. We believe that Conspicuous consumption can be explained by using these strategic models, and will conduct a survey type experiment to prove this. The paper will be divided up into three sections. The first section will outline Veblen's theory and discuss the different types of conspicuous consumption. The second section will explain the idea behind Arms Races or the Hawk-Dove Game and outline some of the existing literature on this. The final section will consist of the application of these Game Theory priciples to the idea of Conspicuous Consumption.

Conspicuous Consumption

In most Neo-classical models of the market for goods, it is assumed that price is set by taking supply and demand into account. The market supply curve is a function of the costs of production, and the market demand curve is a function of consumers' preferences and income. It is at the intersection of these two curves that the market will find an equilibrium price. There are, however, a few complications that can arise in this model. The complication that is of interest to us right now is the trend of conspicuous consumption. Conspicuous Consumption is defined as the act of consuming expensive, or showy goods, that are also referred to as "luxury" goods. These goods often are of the same quality as lower priced goods, but offer a societal benefit to the consumer. In this model, higher priced items offer a type of status benefit and are therefore, more desireable. It is, however, important to understand that is not "the price of an object that affects utility directly, or that individuals seek to pay high prices for the sheer pleasure of being overcharged. Rather, [Veblen] proposed that individuals crave status, and that stutus is enhanced by material displays of wealth" (Bagwell 350). In this manner, conspicuous consumption, or the practice of consuming items for the enhancement of one's relative position, alters the typical models of supply and demand by making demand for certain items a function of price.

Thorstein Veblen

EVOLUTIONARY GAME THEORY VERSUS CLASSICAL GAMETHEORY. (POLITICAL IDEAS OF VEBLEN) Thorstein Veblen was an American-Norwegian moral philosopher, sociologist, and economist who published a few influential works at the very beginning of the 20th Century. His first book The Theory of the Leisure Class was published in 1899 while he was teaching at the University of Chicago. In this book he introduced and outlined the theory of Conspicuous Consumption. In addition to this contribution to the field of economics, Veblen is also well known as one of the major influences to the Institutionalist perspective within Economics.

Invidious Comparison

Invidious Comparison - When a member of a higher class practices conspicuous consumption in an attempt to separate themselves from the lower classes, in turn creating envy of the consumer.

Pecuniary Emulation

Pecuniary Emulation - When a member of a lower class consumes conspicuously in an attempt to appear a member of a higher class.

Arms Race

"For an imbalance to occur in favor of armaments, the reward from armaments spending must be more context sensitive than the reward from nonmilitary spending. And since this is precisely the case, the generally assumed imbalance occurs. After all, to be second-best in a military arms race often means a loss of political autonomy, clearly a much higher cost than the discomfort of having less elaborate outdoor cooking appliances." Luxury Fever, Robert Frank, page 162.

Application of Game Theory to Conspicuous Consumption

Does Conspicuous Consumption follow a Hawk-Dove model? When modeling this, the individuals have two choices: Conspicuously consume ("Consume") or, conversely, save the money that would have gone to conspicuous consumption ("Save").

Payoffs to Conspicuous Consumption:

	Consume	Save
Consume	(-5,-5)	(3,-3)
Save	(-3,3)	(0,0)

The values above are arrived at based on the following: Conspicuously consuming carries a cost, but gives utility provided others do not follow the same course of action. Thus, when both players Conspicuously Consume (a 'Hawk' action) they suffer losses from expended income that brought no advancement in social status. When one player consumes and another does not, the consumer receives a gain in utility from advanced social status (which is greater than their expenditure), and the player who did not consume falls in relative social position. When both do nothing, everything remains the same. In this game, any benefit to one player is accompanied by an equal loss in utility by the other player.

One feature of major importance in conspicuous consumption "arms races" is that each round of conspicuous consumption changes the payoffs for future interactions. For example, in a two player game, if in the first interaction Player A conspicuously consumes, but Player B does not, in the next "round" of the game, Player B has a greater payoff to conspicuous consumption, and Player A has a lesser payoff. This is because the relative gains from conspicuous consumption have shifted.

These can be modeled by changing the payoffs of the game. Assume that u₁ represents Player 1's utility, and u₂ represents Player 2's utility.

Assuming the two start as equals,

u₁ = u₂ = 1

(u₁ - u₂)/c = j

The payoffs might look like this:

	Consume	Save
Consume	(-.25,-.25)	(.1,-.1)
Save	(-.1,.1)	(0,0)

	Consume	Save
Consume	(-.25,-.25)	(.1-j,-(.1-j))
Save	(-(.1+j),.1+j)	(0,0)

What has happened here is that Player 1, by virtue of already having a higher status than Player 2 through previous conspicuous consumption, now has less to gain from consuming. Player 2, however, has even more to gain, by virtue of being of lower relative status