Advertising, Commitment, and Social Image
Nick Vikander
October 2014
Abstract
This paper explores optimal pricing and informative advertising when consumers value social image. A
monopolist advertises and sells a good to consumers who are either conformists or snobs, who respectively
experience positive or negative consumption externalities. Unlike with traditional network goods, these
externalities depend not on actual quantity sold, but on the perceived value of quantity sold, as averaged
across all consumers.
I show that social image concerns generate a commitment problem for the firm that drives up the
price to conformists and drives down the price to snobs. The firm can reduce the severity of this problem
by increasing its advertising, but a drop in advertising costs can sometimes make the commitment
problem more severe. I show that the equilibrium price is non-monotonic in advertising costs, equilibrium
advertising intensity may appear excessive or insufficient, and that making targeted advertising possible
can reduce profits.
JEL classifications: D03, D11, D83, M37
Keywords: advertising, image concerns, consumption externalities
1
Introduction
A wealth of evidence suggests that consumers are often influenced by social image concerns. Some consumers
may buy products to convince others that they are wealthy or prosocial (Charles et al., 2009; Heffetz, 2011;
Friedrichsen and Engelmann, 2013; Sexton and Sexton, 2014). Other consumers may have different socialimage motives, such as a desire to be perceived as different from others, or as conforming to others’ behavior.
Department of Economics, University of Copenhagen. Øster Farimagsgade 5, DK-1353 Copenhagen K, Denmark. Email:
[email protected].
1
Vigneron and Johnson (1999) describe how such snobbism and conformity can be important motivations for
prestige-seeking consumer behavior. A common approach to modelling this behavior has been to assume
consumers experience positive or negative network externalities that depend directly on quantity sold.
The current paper takes a different approach. The premise is that when consumers value social image,
consumption externalities should be modelled directly in terms of consumer beliefs. What matters to such a
snob or a conformist is then not the actual popularity or exclusivity of a certain good, but the popularity or
exclusively that others perceive. Certainly, in equilibrium these will coincide, since consumer expectations
about quantity sold will be confirmed on average. But more generally they may differ in any economic
environment where some consumers are more informed than others about market conditions.
This paper considers one such setting, where a firm can inform consumers about the good that it sells
through advertising. Specifically, I consider a monopolist who serves a market where the payoff from buying
depends on the average belief about quantity sold, taken across all consumers. Consumption externalities
can be positive or negative, depending on whether consumers are conformists or snobs. The firm sets price
as well as advertising intensity. Advertising is informative, where consumers can only buy the firm’s good
if they receive an ad. These informed consumers can also observe the firm’s choice of price and advertising
intensity, whereas uninformed consumers, who do not receive ads, cannot.
The crucial feature here is that the firm can help consumers who receive ads mislead those who do not.
In equilibrium, consumer expectations about price and advertising are correct, so that all consumers will
correctly anticipate equilibrium quantity sold. But these equilibrium values are constrained by the firm’s
ability to set an unexpected price and advertising intensity that uninformed consumers will not observe.
These deviations affect quantity sold and imply that uninformed consumers hold incorrect beliefs off the
equilibrium path. Informed consumers realize this is the case, for example that the good may still be
perceived as exclusive after an unexpected price reduction, which can drive up their willingness to pay.
The fact that consumption externalities depend directly on beliefs generates a commitment problem
for the firm that drive all the paper’s results. In particular, compared to a baseline with commitment, or
with network externalities that depend directly on quantity sold, the firm will now charge a higher price if
consumers are conformists, and a lower price if they are snobs. Advertising at high intensity reduces the
number of uninformed consumers, which helps the firm commit to a more profitable price. Even though
advertising helps with commitment, the relationship between equilibrium price and equilibrium advertising
intensity will be non-monotonic. The reason is that changes in advertising and in expected advertising may
affect pricing in opposite directions. If targeted advertising technology is available, then the firm will always
prefer to target ads at consumers who want to buy. At the same time, making targeting possible may actually
2
reduce profits, since the firm’s inability to commit to broad advertising exacerbates its inability to commit
to price.
A number of previous papers have explored how conformist and snobbish consumers affect firm pricing
and advertising decisions (Becker, 1991; Karni and Levin, 1994; Amaldoss and Jain, 2005a,b; Buehler and
Halbheer, 2011, 2012). This literature assumes consumers are fully informed, and so can always correctly
predict quantity sold, both on and off the equilibrium path. In such a setting, there is no distinction between
network externalities that depend directly on sales, which they consider, and consumption externalities that
depend directly on beliefs, as I consider. Put another way, self-image concerns and social-image concerns
then coincide. This means that commitment problems play no role in this literature, whereas they drive the
entire analysis here.
The most similar work is Vikander (2014), who also looks at the impact of informative advertising when
consumers care how they are perceived by others. Consumers there have status concerns and want to signal
their wealth through their purchases. The analysis focuses on how advertising can affect willingness to pay
by increasing stigma and promoting product recognition. Here I concentrate instead on the commitment
problems facing a firm that serves snobs and conformists, in particular how it impacts pricing. The result
that introducing targeted advertising can reduce profits echoes Vikander (2014), and stands in sharp contrast
to other work in the literature, which suggests that targeting should benefit a monopolist whenever it reduces
costs. (Hernandez-Garcia, 1997; Esteban et al., 2001, 2006).
The rest of the paper is organized as follows. Section 2 sets out a model of consumption where consumers
value social image. Section 3 carries out the analysis, focusing on the firm’s commitment problem with
respect to price, and how it relates to advertising intensity. Section 4 then concludes.
2
Model
A monopolist produces a good of fixed quality at zero production costs. It sets price p ¥ 0 and advertising
intensity φ
P r0, 1s.
With the exception of the final proposition on targeting, I assume throughout that
advertising is random, so that each consumer receives an ad with probability φ. The cost of advertising
is KC pφq where K
¡ 0 is a shift parameter related to advertising technology. These costs are increasing
and convex in advertising intensity: C p0q C 1 p0q 0, C 2 p0q ¡ 0. Unless otherwise noted, I assume
limφÑ1 C 1 pφq 8, to guarantee interior solutions.
The firm faces a measure 1 of consumers with unit demand. A consumer can only buy the good if he
receives an ad. I will say that consumers who receive ads are informed and consumers who do not are
3
uninformed. Each consumer’s payoff from buying consists of an intrinsic and a social-image component. The
intrinsic payoff from buying is a consumer’s type minus the price, θ p, where θ is uniformly distributed on
³
r0, 1s. The social-image payoff from buying is λ 01 Epq | θqdθ, which is proportional to the average expectation
consumers hold about quantity sold. If λ ¡ 0, then consumers are conformists. If λ 0, they are snobs.
Consumers who do not buy take an outside option that gives a payoff of zero.
The timing of the game is as follows. The firm first sets price and advertising intensity. Informed
consumers observe p and φ and form expectations about q. Uninformed consumers do not observe price or
advertising intensity and so their expectations about q depend only on expectations of p and φ. Informed
consumers choose whether or not to buy and payoffs are realized.
For one part of the analysis, I will assume that the firm can commit to its choice of φ. This raises the
question of whether uninformed consumers who realize the firm has deviated in advertising intensity should
infer there has also been a deviation in price. Following McAfee and Schwartz (1994) and Rey and Verge
(2004), I assume that consumers have wary beliefs. They understand that the firm is rational, and so believe
it will deviate to the price p that is optimal given that consumers expect it, and given the new advertising
intensity.
3
Analysis
I begin the analysis by showing how demand depends on the price and advertising intensity that informed
consumers observe, and on those that uninformed consumers expect. Willingness to pay is increasing in
type, so that consumer behavior follows a threshold structure. At any price p, advertising intensity φ,
and uninformed-consumer expectation about quantity sold qe , there will exist a critical type θ such that
informed consumers prefer to buy if and only if θ
q
¥ θ . Demand is therefore
φp 1 θ q ,
(1)
which is the measure of consumers who are both informed and whose willingness to pay exceeds the price.
The critical type is defined by the indifference condition
θ
pλ
»1
0
Epq | θqdθ.
(2)
Informed consumers observe p and φ, so they can correctly infer quantity sold q. Uninformed consumers
hold expectations qe . These expectations will be confirmed in equilibrium, but qe may differ from q if the
4
firm sets an unexpected advertising intensity or price. A fraction φ of consumers are informed, so that (2)
implies critical type
θ
p λ pφq p1 φqqe q .
Substituting into (1) yields the following implicit expression for demand
q
φ p1 p
λ pφq
p1 φqqe qq .
(3)
Uninformed consumers know that demand is given by (3), so their expectations qe are defined by the
same expression, but evaluated at expected price pe and expected advertising intensity φe . Taking these
expectations and rearranging gives
qe
φ1e p1 λφpe q .
e
Substituting back into (3) and simplifying yields
q
φ
1 λφ2
1p
λp1 φqφe p1 pe q
1 λφe
,
where profits are
π
p 1 φλφ2
1p
λp1 φqφe p1 pe q
1 λφe
KC pφq.
(4)
Expression (4) shows that profits depend on uninformed-consumer expectations, pe and φe . None of these
consumers are able to buy the good in question. However, their expectation of quantity sold will influence
the behavior of informed consumers, whose social image depends on how others will perceive them after their
purchase.
The fact that profits depend on uninformed-consumer beliefs generates a commitment problem for the
firm. It realizes that only informed consumers will respond to changes in price and advertising intensity,
since only informed consumers can observe any such change. But this may make it attractive for the firm to
unexpectedly change its price or advertising so as to mislead uninformed consumers.
For the sake of comparison, I first present a baseline result where I assume that the firm can commit to
its choice of price.
Proposition 1. Suppose the firm can commit to a price p. Then it will set pc
1{2, which is also the
optimal price if consumption externalities were equal to λq, so directly proportional to quantity sold.
5
Proof. Suppose the firm commits to price p pe . From (4), profits are
π
1 φλφ2
1 λφφe
1 λφe
pp1 pq KC pφq.
The first-order condition for price immediately implies pc
externalities are equal to λq, rather than λpφq
1{2.
Now suppose instead consumption
p1 φqqe q. This is equivalent to setting q qe in expression
(3). Solving for quantity sold gives
q
1 φλφ p1 pq.
Profits are
π
p 1 φλφ p1 pq KC pφq,
where the first-order condition for price again implies p 1{2 pc .
Proposition 1 allows for different interpretations. First, it describes a baseline where consumers experience network externalities, which depend directly realized sales, rather than on consumers’ beliefs. The
externalities might arise through traditional network effects or through consumer concern for self image.
Second, it describes a baseline where consumers are concerned with social image, which depend directly
on others’ beliefs, but where the firm can somehow solve its commitment problem with regards to pricing.
Proposition 1 shows that for either interpretation, the optimal price is independent of advertising intensity.
This result follows from the assumed uniform distribution of types. Although this result is not general,
it is useful in this context, since it means that any difference between the equilibrium price and pc
1{2
in the analysis that follows, and any relationship between the equilibrium price, advertising intensity, and
advertising costs, has a clear cause: the commitment problem generated by social image concerns.
The following result shows that the firm indeed suffers from commitment problems in its choice of price.
Proposition 2. The equilibrium price is higher than the optimal price under commitment if consumers are
conformists, and lower than the optimal price under commitment if consumers are conformists. That is
p
¡ pc if λ ¡ 0, and p pc if λ 0.
Proof. From (4), the first-order condition with respect to price is
1 2p
φ
λp1 φqφe p1 pe q
1 λφe
6
0.
Imposing p pe , rearranging, and simplifying yields the equilibrium price
p
Proposition 1 showed that pc
2 1λp1λφφφeqφ
.
(5)
e
1{2. Thus, p pc is equivalent to
1 λφφe
2 λp1 φqφe
12 .
Simplifying shows this is in turn equivalent to
λφe p1 φq 0,
which holds if and only if λ 0.
The crux of the problem is that the firm is tempted to help consumers who are informed fool those
who are not. Suppose for instance that the firm reduces its price. Doing so increases sales and makes the
good less exclusive. If consumers are snobs, then their willingness to pay will also drop, which limits the
increase in sales. But willingness to pay only drops to the extent that informed consumers know that others
realize the price has gone down. It follows that a surprise price reduction allows informed consumers to
fool uninformed consumers into thinking the good is more exclusive than it actually is. This in turn pushes
the firm to set the price sufficiently low in equilibrium that it is not tempted to reduce it further still. If
instead consumers are conformists, the firm will set the price sufficiently high in equilibrium to make further
increases unattractive.
As shown below, the severity of the firm’s commitment problem with respect to price is influenced by its
choice of advertising.
Proposition 3. The optimal price is decreasing in the firm’s chosen advertising intensity if consumers
are conformists, and increasing in advertising intensity if consumers are snobs: BBφ pop 0 if λ ¡ 0 and
B op
Bφ p ¡ 0 if λ 0. However, the equilibrium price is non-monotonic in equilibrium advertising intensity:
(i) there exists φc such that BφB p ¡ 0 for φ P r0, φc q and BφB p 0 for φ P pφc , 1s when λ ¡ 0, and (ii)
there exists φs such that BφB p 0 for φ P r0, φs q and BφB p ¡ 0 for φ P pφs , 1s when λ 0.
Proof. Differentiating (5) with respect to φ gives
Bpop λφe p2 λφe p1 φqq λφe p1 λφe φq .
Bφ
p2 λp1 φqφe q2
The numerator simplifies to
7
λφe pλφe 1q,
which has the opposite sign as λ, by the assumption λ
¡ 0 if λ 0.
Setting φ φe φ in (5), the equilibrium price is
1.
B op
Bφ p
p
which equals p
It follows that BBφ pop
0 if λ ¡ 0 and
2
2 1λp1 λφφ qφ ,
pc 1{2 both when φ 0 and when φ 1.
(6)
Hence, the equilibrium price must be
non-monotonic in equilibrium advertising intensity. Differentiating (6) with respect to φ yields
Bp 2λφ p2 λφ p1 φ qq
B φ
p2 λp1
λp1 2φ qp1 λφ 2 q
.
φ qφ q2
The numerator simplifies to
λpλφ
2
2φ
1q.
0, and equals λpλ 1q when φ 1, which has the opposite sign of λ by the
assumption λ 1. Since λφ 2 2φ 1 is quadratic in φ , it follows that BBφp has the same sign as λ if and
only if φ is below a threshold value, defined by φs when λ 0 and by φc when λ ¡ 0, as required.
It equals λ when φ
The first part of the result shows that increased advertising helps the firm commit to its choice of price.
The higher the level of advertising, the smaller the number of consumes who are uninformed, so the lower the
firm’s ability to fool consumers with an unexpected price change. Informed consumers considering whether
to buy the good also realize that this is the case. It follows that increasing its advertising intensity allows
the firm to credibly set a price closer to the unconstrained optimum. This means a lower price if consumers
are conformists and a higher price if consumers are snobs.
If consumer type was not uniformly distributed, then the firm’s choice of advertising intensity might also
directly affect the optimal price through consumption externalities. For conformists, observing increased advertising drives up willingness to pay, which would likely yield a higher optimal price in many circumstances.
Similarly, for snobs, it seems plausible that observing increased advertising intensity would often yield a
lower optimal price. Neither effect has any connection to commitment. The predictions of Proposition 1
can be distinguished from these effects because they move in the opposite direction. Commitment problems
means that increased advertising reduces the optimal price when consumers are conformists, and increase
the optimal price when they are snobs.
8
The second part shows than even though increased advertising helps the firm with respect to pricing, the
relationship between equilibrium advertising intensity and the firm’s commitment problem with price is nonmonotonic. If advertising costs are low, so that equilibrium advertising is high, the firm can charge a price
close to the unconstrained optimal level. Surprisingly, it can also charge a similar price if advertising costs
are high, so that equilibrium advertising is low. The intuition is that low equilibrium advertising means that
quantity sold is relatively insensitive to price, so that an unexpected price change cannot fool uninformed
consumers by very much. One implication is that a drop in advertising costs will only reduce the firm’s
pricing problem if costs are already low; otherwise, it will make the problem worse. Another implication
is that we should not expect an unambiguous empirical relationship between observed advertising intensity
and price.
In this setting, the firm actually faces two commitment problems. The analysis so far shows that the firm
suffers from being unable to commit to its choice of price. At the same time, the firm would like to commit
to its choice of advertising intensity. In the absence of commitment, the firm can unexpectedly change its
advertising away from the intensity that uninformed consumers expect, fooling them into thinking the good
is more or less exclusive than it actually it.
The following result explores the consequences of having the firm commit to advertising intensity. In
practice, there are various ways that firms might try to commit to different levels of advertising. For
example, they might develop a reputation over time for avoiding widespread advertising. In contrast, they
might cultivate the opposite reputation by systematically advertising new products at well-known events.
They might also pay up front for long-term advertising outlays, effectively committing to broadly advertise
any new products. Either way, the firm’s commitment to advertising can influences its commitment problem
with respect to price in a somewhat unexpected way.
Proposition 4. Suppose the firm can commit to its choice of advertising intensity φ. Then if advertising
costs K are sufficiently low, the firm appears to advertise too much: the marginal cost of advertising exceeds
the marginal revenue from advertising, holding fixed the equilibrium price, so that BBπφ
0.
If advertising
costs K are sufficiently high, then the firm appears to advertise too little: the marginal cost of advertising is
lower than the marginal revenue from advertising, holding fixed the equilibrium price, so that BBπφ
¡ 0.
Proof. By assumption, consumers hold wary beliefs. This means that following a deviation in advertising
intensity, they expect the price p that the firm will find optimal, given that consumers expect it, and given
the new advertising intensity φ. This is precisely the value of p given by (6).
The total derivative of profits with respect to advertising intensity is
9
dπ
dφ
dp
BBπφ BBpπ dφ
,
with again p given by (6). The first-order condition for advertising intensity is
Since p pe
Bπ Bπ dp .
Bφ
Bp dφ
dπ
dφ
0, which implies
(7)
p and φe φ, profits (4) reduce to
p qφ
p p11λφ
KC pφq,
so that BBpπ ¡ 0 if p 1{2 and BBpπ 0 if p ¡ 1{2.
Recall that C 1 p0q and limφÑ1 C 1 pφq 8. It follows that the optimal advertising intensity φ will tend to
π
1 as K approaches zero, and it will tend to 0 as K becomes very large.
Suppose that λ 0. Proposition 2 showed that in this case p 1{2, so that BBpπ ¡ 0. Proposition 3
dp
showed that BBφp ¡ 0 when φ is close to 1 and BBφp 0 when φ is close to zero. This implies BBpπ dφ
¡0
dp
when K is sufficiently small and BBpπ dφ
0 when K is sufficiently large.
Now suppose instead that λ ¡ 0. Proposition 2 showed that in this case p ¡ 1{2, so that BBpπ 0.
Proposition 3 showed that BBφp 0 when φ is close to 1 and BBφp ¡ 0 when φ is close to zero. This again
dp
Bπ dp
implies BBpπ dφ
¡ 0 when K is sufficiently small and Bp dφ 0 when K is sufficiently large.
Proposition 4 shows that in equilibrium, the firm may engage in what appears to be excessive or insufficient advertising. Which is the case does not depend on whether consumers are conformists or snobs but
instead on whether advertising costs are low or high. In the first case, reducing advertising intensity below
its equilibrium level would generate cost savings that more than outweigh the lost revenue from reduced
demand at the equilibrium price. In the second case, increasing advertising would yield high enough demand
at the equilibrium price to outweigh the increased advertising costs. The problem is that the firm will no
longer find it optimal to charge the equilibrium price at this new level of advertising. The firm will instead
be constrained to charge a price that is further away from the optimal level with commitment. In short,
reducing advertising intensity makes the price commitment problem more severe.
This result relies on two important points. The first is that consumers hold wary beliefs. When they
observe a change in advertising, they understand the firm will also change its price, and they expect the
price that will indeed be optimal given that they expect it. It follows that uninformed consumers will not
be fooled by a deviation in advertising intensity. They correctly anticipate the firm’s new price at the new
10
level of advertising. They also realize that a small drop in advertising will increase the price commitment
problem when advertising levels are high, and decrease the commitment problem when levels are low, as
discussed following Proposition 3. The second is that the equilibrium price differs from the unconstrained
optimum under commitment. This ensures that the price change that uninformed consumers expect, and
that the firm actually carries out, has a first-order effect on profits.
I now explore how the possibility of using targeted advertising affects firm profits. Targeting effectively
allows the firm to direct ads to consumers with relatively high willingness to pay. Applied to the current
P r0, 1s, where a fraction φ of
All consumers with type t P r0, tq remain uninformed. Setting
setting, the firm sets not only advertising intensity φ but also targeting t
consumers with type θ
t
P rt, 1s receive ads.
1 therefore corresponds to random advertising across the entire market, as considered up to now in
the analysis. For the result that follows, I assume that targeting, advertising intensity, and price are only
observable to consumers who receive ads.
Denote the cost of advertising at intensity φ and targeting t by KC pφ, tq. I assume Cφ p0, tq
t
P r0, 1s.
I also assume Cφ pφ, tq
¡ 0 when φ ¡ 0, with Cφφ pφ, tq ¡ 0, and Ct pφ, tq 0.
0 for all
Informing more
consumers is always costly, whether the firm does so by increasing advertising intensity, or by advertising
more broadly (reducing targeting). For the sake of simplicity, I assume for this result that C pφ, tq is bounded
from above, but this is not essential.
Proposition 5. In equilibrium, the firm will target ads precisely on consumers who are willing to buy,
t
1 θ .
However, if advertising costs K are sufficiently low, then equilibrium profits would be higher if
the firm could commit to t 1, that is to advertise as broadly as possible.
Proof. Consider a candidate equilibrium with t
1 θ .
Quantity sold is then φp1 θ q, just as under
random advertising to all consumers, and is independent of t. It follows that deviating to t
increase profits. It will leave revenues unchanged, and by Ct pφ, tq 0 it will reduce costs.
Now consider a candidate equilibrium with t
¡ 1 θ .
1 θ will
Quantity sold is then φp1 tq, since θ
t ¡ θ
is the lowest type to receive an ad. All consumers who buy the good have willingness to pay strictly higher
than the price, since type θ is indifferent about buying, and willingness to pay is increasing in type. Thus,
the firm can profitably deviate to a marginally higher price, leaving quantity sold unchanged.
Now suppose that K is sufficiently low that for any t, the optimal advertising intensity φ equals 1. Setting
1 will be optimal for sufficiently low K since C pφ, tq is bounded from above. Say the firm can commit
to t 1. Then (5) implies that the equilibrium price is p 1{2, which is the unconstrained optimum.
Now say the firm cannot commit to t 1, and therefore sets t 1 θ 1. Then profits are
φ
11
φ
πp
1 λtφ2
1p
λp1 φtqφe p1 pe q
1 λφe
KC pφq.
(8)
Expression (8) is equivalent to (4), except the terms λφ have been replaced by λφt, to reflect the fact
that a measure φt of consumers are now informed. Setting p pe in (8) shows that profits are proportional
to pp1 pq, so the optimal price with commitment is again pc
a marginal increase in price,
1{2. Profits are still given by (8) following
since the critical type is increasing in price, implying θ ¡ t following the
deviation. Differentiating (8) with respect to p therefore shows that the equilibrium price is bounded away
from 1{2 when φ 1, because the term p1 φtq is non-zero.
1 yields strictly higher revenues than
setting t 1 θ 1. The two cases yield identical costs in the limit, since both KC p1, 1q and KC p1, tq
tend to zero. It follows that committing to t 1 gives strictly higher profits.
It follows that in the limit as K tends to zero, committing to t
Consistent with most work on targeting, the firm will always prefer to use targeted advertising, since it
is the cheapest way to reach consumers who want to buy. Ads sent to consumers who prefer not to buy are
simply wasted. Targeting allows the firm to save on advertising costs without reducing sales.
At the same time, Proposition 5 shows that the firm may actually suffer from its ability to target. This
suggests that advances in advertising technology that make targeting possible may actually hurt the firm.
The intuition is that broad advertising offers an implicit commitment to inform more consumers. The firm
is effectively constrained to inform some consumers who are not going to buy, but who happen to randomly
receive ads. This in turn reduces the firm’s commitment problem with respect to price. If the firm uses
targeting advertising, then fewer consumers will become informed, which makes the commitment problem
more severe. At the same time, the firm cannot credibly use broad advertising in equilibrium, since it can
always deviate to targeting and save on costs.
4
Conclusion
This paper identifies and explores the commitment problems facing a firm that serves consumers who value
social image. The firm uses advertising to inform consumers who are either conformists or snobs, who are
directly concerned with each others’ beliefs about the popularity or exclusivity of the good they buy. Some
consumers remain uninformed, leaving the firm tempted to help consumers who receive ads mislead those
who do not. It can do so by unexpectedly changing its price or advertising intensity to make the good
more or less exclusive than it appears to be. This temptation to deviate off the equilibrium path in turn
12
drives equilibrium pricing and advertising decisions. The effects identified here are all absent if consumption
externalities are modeled directly in terms of quantity sold, as has been the case up to now in the literature.
An interpretation is that the results here should hold when consumers care about social image, which should
depend on others’ beliefs, but not when they only value self image, which should not. The results then present
the possibility to empirically distinguish between these two different types of consumer image concerns, which
could be explored in future work.
References
Amaldoss, W. and Jain, S. (2005a). Conspicuous consumption and sophisticated thinking. Management
Science, 51(10):1449–1466.
Amaldoss, W. and Jain, S. (2005b). Pricing of conspicuous goods: A competitive analysis of social effects.
Journal of Marketing Research, 42(1):30–42.
Becker, G. S. (1991). A note on restaurant pricing and other examples of social influences on price. Journal
of Political Economy, 99(5):1109–1116.
Buehler, S. and Halbheer, D. (2011). Selling when brand image matters. Journal of Institutional and
Theoretical Economics (JITE), 167(1):102–118.
Buehler, S. and Halbheer, D. (2012). Persuading consumers with social attitudes. Journal of Economic
Behavior & Organization, 84(1):439–450.
Charles, K. K., Hurst, E., and Roussanov, N. (2009). Conspicuous Consumption and Race. The Quarterly
Journal of Economics, 124(2):425–467.
Esteban, L., Gil, A., and Hernandez, J. M. (2001). Informative advertising and optimal targeting in a
monopoly. Journal of Industrial Economics, 49(2):161–180.
Esteban, L., Hernandez, J. M., and Moraga-Gonzalez, J. L. (2006). Customer directed advertising and
product quality. Journal of Economic & Management Strategy, 15(4):943–968.
Friedrichsen, J. and Engelmann, D. (2013). Who Cares for Social Image? Interactions between Intrinsic
Motivation and Social Image Concerns. Technical report.
Heffetz, O. (2011). A Test of Conspicuous Consumption: Visibility and Income Elasticities. The Review of
Economics and Statistics, 93(4):1101–1117.
13
Hernandez-Garcia, J. M. (1997). Informative advertising, imperfect targeting and welfare. Economics Letters,
55(1):131–137.
Karni, E. and Levin, D. (1994). Social attributes and strategic equilibrium: A restaurant pricing game.
Journal of Political Economy, 102(4):822–840.
McAfee, R. P. and Schwartz, M. (1994). Opportunism in multilateral vertical contracting: Nondiscrimination,
exclusivity, and uniformity. The American Economic Review, 84(1):210–230.
Rey, P. and Verge, T. (2004). Bilateral Control with Vertical Contracts. RAND Journal of Economics,
35(4):728–746.
Sexton, S. E. and Sexton, A. L. (2014). Conspicuous conservation: The Prius halo and willingness to pay
for environmental bona fides. Journal of Environmental Economics and Management, 67(3):303–317.
Vigneron, F. and Johnson, L. W. (1999). A review and a conceptual framework of prestige-seeking consumer
behavior. Academy of Marketing Science Review, (1):1–15.
Vikander, N. (2014). Advertising to status-conscious consumers. Technical report, Mimeo.
14