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

Conspicuous Consumption is the act of consuming expensive, showy goods, often called "luxury" goods. These goods often are of the same quality as lower priced goods, but offer a societal benefit to the consumer.

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)	(5,-1)
Save	(-1,5)	(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, and the player who did not consume falls in relative social position. When both do nothing, everything remains the same.

The payoffs to Conspicuous Consumption can be seen as similar, with consuming conspicuously being a "hawk" action, and not consuming conspicuously being a "dove" action.

One major difference between Conspicuous Consumption/Arms Races and a Hawk Dove game 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.

For example, if Player 1 (row) was to conspicuously consume while Player 2 (column) did nothing, the payoffs would change:

	Consume	Save
Consume	(-5,-5)	(4,-1)
Save	(-1,6)	(0,0)