- Email: [email protected]
The Snop Effect in the Consumption of Luxury Goods
Available online at www.sciencedirect.com
Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
WC-BEM 2012
The snop effect in the consumption of luxury goods Ergin Uzgoren*a, Taner Guney b a
Department of Economics,Dumlupinar University, Kutahya P.O .Box 43000, Turkey Department of Foreign Trade,Dumlupinar University, Kutahya P.O .Box 43700, Turkey
b
Abstract Despite the global crisis in the world the importance of the consumption of luxury goods is not reduced. This situation makes the examination of the various aspects of the consumption of luxury goods interesting. In this study, we primarily focused on the definition and effects related to the consumption of luxury goods in general theoretical framework. Then one of the effects of commodity price increases, which decreases the accessibility of the individual to increase the consumption of luxury goods, which expresses the snop effect is studied in detail. In this study, basic elements of a consumer's consumption of goods as a result of snop effects are taken into account, and also a monopoly firm's strategies to meet the snop goods demand is tried to be evaluated. © 2012 Elsevier Ltd.Ltd. Selection and/or peer review under under responsibility of Prof. Dr. Huseyin © 2012Published Publishedbyby Elsevier Selection and/or peer review responsibility of Prof. Dr. Arasli Hüseyin Arasli
Keywords: Luxury goods; snob effect; consumption; goods; consumer;
1. Introduction Since mankind has been trying to please itself with the presence of fine goods for centuries, luxurious goods * have been an intensive point of interest and discussion. When compared to the past, today some consumers have a high income level with which they can make more discretionary consumption expenditure. Although they have demonstrated a balanced increase within income hierarchy, they are significantly ranked at the top social classes. It is apparent that today these consumers are willing to make rather high remunerations for luxurious goods (Husic and Cicic, 2009: 231). The world luxurious goods market has increased to 68 billion dollars in 2000 from 20 billion dollar level in 1985, by demonstrating a constant growth despite September 11 th attacks and other incidents that disrupt global trade (The Economist: 2002). For example, according to The Sunday Telegraph import of Australia in 1996 showed an increase of 1130% in mink fur and 27.5% in diamond when compared to the previous year. The demand of Australians for fur, diamond, champagne and caviar in particular has displayed a great increase during this period (Rees, 1997:8). The improvement of USA economy in 1997 and the rapid increasing demand of Asian countries lead to the rapid growth of luxurious goods market in early 2000s. The number of millionaires has increased so much that richness is not measured with millions anymore. In 2004, there were 8.3 million rich people in the world, 7.5 million of which had a house in USA and 425 thousand of which resided in the Great Britain (Merrill Lynch &Cap Gemini, 2005). * -274-265-2193; fax: +0-274-265-2197. E-mail address: [email protected] *
1877-0428 © 2012 Published by Elsevier Ltd. Selection and/or peer review under responsibility of Prof. Dr. Hüseyin Arasli doi:10.1016/j.sbspro.2012.09.105
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
629
Additionally in the 2006 Market Research Report prepared for the Europe (Datamonitor, 2002), it was estimated that there would be a consumer group which exceeds 27 million people who would acquire personal income more than 50,000 Euros per year in order to be spent for luxurious consumption. These data supports the significance of luxurious goods market and its strong tendency to constant growth. owned by individuals who consist 2% of the wealthy. Such rich people reside in North America, Europe, Japan and (LuxuryInstitute, 2006). In 2004 236 thousand people in China and 61 thousand people in India have become millionaires (Merrill Lynch &Cap Gemini, 2005). 37% of luxurious goods consumption occurs in Asia, 35% in Europe, 24% in USA and the remaining 4% occurs in other regions (Chadha and Husband, 2006). prepared by the Boston ConsultingGroup (BCG), world luxurious consumption market has reached trade volume of 1 trillion Euros by growing nearly 13% in 2010. According to this report, among luxurious expenditure; luxurious travel and accommodation is ranked first with 270 billion Euros, luxurious cars are ranked second with 250 billion Euros, luxurious technology products are ranked third with 100 billion Euros. Furthermore, it was concluded in the report that 4 main tendencies are prominent in luxurious goods market. According to this fact, customers want luxurious experience rather than showy luxurious products. Luxury is shifting to developing markets. While luxurious consumption has been associated with centers such as London, Paris, New York, Milan and Tokyo until now, today this situation is rapidly changing. Markets such as China, Russia and Gulf Countries are becoming luxurious consumption centers. According to the report which states that the share of Turkey in luxury market is 0.5 percent, the difference between luxury brands and nonluxury brands is decreasing; the consumers are moving both up and down between segments (BCG, 2010). According to a study conducted for Italian luxury goods producers federation Fondazione Altagamma by market study company Bain&Company, it was determined that despite the problems in the global economy, the luxury consumption sector would not encounter any significant problems. With the influence of the Asian market, China in particular, it is estimated that the sector would grow by 10% in 2011. According to the study, it is anticipated that in 2011 the sector would grow by 29% in China, Hong Kong, Macao and Taiwan and by 25% in Asia-Pacific region World gazette), 17.10.2011). It is seen that the first studies in literature towards examining luxury goods consumption behavior of the consumers were conducted by Rae (1834), Veblen (1899) and Keasbey (1903). Then, the studies, especially the ones in marketing literature, were focused on luxurious brands, expansion of brands in particular, (Roux, 1995), competitive management in mass marketing and luxury goods principles (Bechtold, 1991; Roux, 1994; Roux and Floch, 1996), and measurement of reactions against the idea of luxury goods (Dubois and Duguesne, 1993; Dubois and Laurent, 1994). Whereas in 2000s, due to luxury goods market gaining a new dimension with the unique demand coming from Asian and Western communities, the conducted studies mainly focused on inter-societal culture differences that affect the idea of luxury goods and luxury goods concept created by such differences (Dubois and Laurent, 1996; Dubois and Paternault, 1997). Traditionally luxury goods are defined as goods for which the usage or display of a particular branded product provides prestige to its owner along with any functional utility (Grossman and Sharpiro, 1988). Deeter-Schmelz et of store type and atmosphere, merchandise price and quality as well as branding and fashion combine to create a offer the individual to have a well-known brand identity, enjoy high brand awareness and perceived quality. Therefore, they assumed luxury brands retain sales levels and customer loyalty. Similarly, Beverland (2004) created a luxury brand model with the following dimensions: Product robustness The value of the product for the consumer Culture History of the product Marketing and
630
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
Support Moore and Birtwistle (2006) are critical towards this model and suggest that more details are needed in order to build a modern luxury brand. Vigneron and Johnson (1999) defined 5 values of prestige behavior combined with 5 significant motivations and (1999) categorization of luxury products hedonists and perfectionists are more interested in pleasure (enjoyment, benefit) derived from the consumption of luxury products. Therefore, they are less interested in the price than quality, product properties and consumption performance. The price only serves as a proof of quality for these consumers; and they know what they want and use their own consumption judgment. Veblen, snob and bandwagon effects arise from the importance associated with the price of the goods by the consumer because a higher price establishes a higher prestige level for these consumers. Therefore, according to Veblen, snob and bandwagon consumers are individuals who perceive the price as the most important factor. They usually buy rare products and emphasize their status in this way. Vigneron and Johnson explain luxury consumption according to the effects detailed below. The Veblen Effect (perceived conspicuous value): Since the primary aim of Veblen consumers is to impress others, they accept price as an indicator of prestige and attach great importance to it. Therefore, they increase their demand as the price of the product increases. The Snob Effect (perceived unique value): Snob consumers see the price as an indicator of privilege and avoid using popular brands in order to have an inner-directed consumption experience, i.e. the need to be the only consumer of a product. The Bandwagon effect (perceived social value): Similar to Snob consumers, bandwagon consumers attach less importance to price as an indicator of prestige, but place greater emphasis on the effect they make on others while consuming prestige brands as an indicator of prestige. The Hedonic effect (perceived emotional value): Hedonist consumers are more interested in their own feelings and pleasure, and therefore attach less importance to price as an indicator of prestige. The Perfectionism effect (perceived quality value): Perfectionist consumers rely on their own perception of product quality and may use price as a further proof of quality. Variables and their significant characteristics effecting luxury goods consumption are shown in Figure 1. While veblen, snob and bandwagon consumers are influenced by social values, hedonist and perfectionist consumers are influenced by personal values.
Social Influences
Personal Influences
Conspicuous Perception
Pomposity
Veblen
Uniqueness Perception
Uniqueness
Snob
Social Value Perception
Harmony
Bandwagon
Emotional Value Perception
Self-Fulfillment
Hedonist
Assurance
Perfectionist
Quality Value Perception
Figure 1: Social and personal influences in luxury consumption (Vigneron and Johnson, 1999:8)
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
631
2. Snob Effect in Luxury Consumption Even though some authors consider that Veblen effect is similar to snob effect, as explained above, in Veblen effect the individual tends to buy more from a product, price of which has risen, in order to impress others. However Snob effect is more complicated because Snob effect, which has been defined by Leibenstein, (1950) contains both social and personal influences. During consumption or purchase of a brand product for prestige purposes snob effect affects the behavior of other individuals and becomes influenced from behaviors of other individuals in addition to social and personal factors (Mason, 1992). The behavior types as per perception and price variables of factors that affect luxury consumption are shown in Figure 2.
Private A w a r e n e s s
Hedonist & Perfectionist
Bandwagon
Snob
Veblen
General Low
High
Importance of Price Perception as an Indicator of Prestige Figure 2: Prestige seeking consumer behavior (Vigneron and Johnson, 1999:4)
As also clearly seen in the Figure, the importance attached to the price is high and importance attached to being recognized is low, in other words the emphasis is not on being the only owner of the goods in Veblen effect. Even though other individuals own the high priced goods, the demand of the individual to such goods will not change in Veblen effect. However in snob effect the importance attached to the price is high as in Veblen, but motivation for being recognized is towards separation from other individuals and being the only owner of the goods. Therefore when other individuals also own high priced goods, snob individual will decrease its demand for those goods. In his study Leibenstein (1950) examined what kind of a demand curve a snob consumer might have. According to the demand curve shown in Figure 3, while the price of a product which appeals to snobs is P2, the market demand for such product is Da and the amount desired to be purchased is a. When E a is at the balance point and when the price of the product drops to P 1, the amount of the product desired to be purchased increase according to Da demand curve. Nevertheless, with the decrease in the price of the product, the product being consumed more in the society would upset individuals who feel as snob. Therefore the interest of snobs to the product decreases and their demand shifts to the left. In case the market price continues to decrease, the interest of snobs in the product will gradually decrease and demand function will shift to the left again. In this way, with each decrease in price the increase in the amount of product demanded will remain below the anticipated increase in demand as a result of the demand of snobs to the product. As a result of the demand of the snobs to the product decreasing as the price of the product decreases (Da, Db, Dc points that show the amount of product that snobs want to buy (E a, Eb, Ec from each new price are combined the demand curve of the snobs would appear. As seen in Figure 3 the demand of
632
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
snobs in Ds form is less flexible when compared to market demand. Snob effect occurs as a result of two factors. The first factor: when a new luxury/prestige product is introduced, snob consumer thinks that by buying such luxury product at that moment s/he would prevent other individuals from buying that product. This factor is also pronounced by Rogers (1983). Second factor: occurs when a consumer that places importance on his/her status does not see a product as a special product and refuses it. Because according to the snob consumer, this product is being consumed by the majority of the society (Mason, 1981). These arguments are also supported by psychologists. According to Snyder and Fromkin (1977), due to need for uniqueness, individuals may determine their consumption behavior in accordance with such need in order to meet the desire to distinguish themselves from other individuals. P
Ea
P2
Eb
P1 Ec
Da Ed
Db E
e
Dc Dd De
0
a
b
c
d,x
e
Q
Figure 3: Snob consumer demand curve (Leibenstein, 1950: 201)
Similarly Matsibekker (2009) stated in his study, in which he examined how a product would be sold to a consumer with snob characteristics, that a product may become a product appealing to the snob individual by emphasizing the personal characteristics that snobs have. In order to achieve that, a seller may adopt a rude attitude to the extent that s/he judges the social status of an individual with snob consumer characteristics. The individual, whose social status is judged, feels the urge to prove his/her social status by buying a product which s/he cannot afford with his/her financial condition at that moment. Thus s/he transforms each purchase decision to an incident by which s/he can prove his/her identity and status. This is what snob effect is (Matsibekker, 2009: 4). Although conventional consumption surveys start from the idea that individuals buy only required goods (Tybout and Artz, 1994), this psychological response given to seller by snob individual might be the most basic theory of the snob effect (Brehm and Brehm, 1981). If sellers act excessively insistent while trying to convince the consumers who give importance to their personal freedom and status, these consumers may decide not to buy the goods in order to keep their personal freedom (Heller et al., 1973). So, the snob effect provides opportunity to an individual to prove his/her status in exchange for the goods to be bought, by criticizing social status of the individual through slight offences and polite rejects (Matsibekker, 2009: 4). A symbolic need to spend within self-actualization act of an individual may be another snob behavior (Wicklund and Gollwitzer, 1982; Gollwitzer and Wicklund, 1985; Brunstein and Gollwitzer, 1996). This is called compensatory consumption. In marketing literature, compensatory consumption can be defined as consumption of any goods in order to fill a deficiency in another field (Gronmo, 1988). In terms of snob individual, compensatory consumption means buying expensive goods in order to fill the deficiency of richness and status. In this buying process, snob individual thinks that s/he would get rich more by spending more money (Elliott, 1994; Friese and Koenig, 1993). For snob individual, compensatory consumption for symbolic purposes can also be behavior of
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
633
improving the values that s/he deems as a threat for her/his status (Wicklund and Gollwitzer, 1982). Snob individual may actualize this improvement by buying the goods which accurately define his/her status and identity (Gollwitzer, 1996). Power of the snob effect may be resulting from the impact created upon the individual by rejecting his/her desire to improve his/her status. This effect type is called rejection of improving status effect. In relation literature, individuals who could response this kind of effect are defined as extremely selective people who prefer the goods which are hard to buy, rather than conventional style individuals (Aronson and Linder, 1965; Wright and Contrada, 1986). The goods which are hard to buy are actually scarce goods. Scarcity raises the value and price of that goods by raising its desirability level (Lynn, 1992). These goods which are harder to obtain may provide advantage to the individual up to a certain status. Being at the top of the unending waiting lists or obtaining a goods which is regularly advertised and can be obtained only by a few elite people can be given as examples. Individual attaches higher importance to and have more respect for this kind of goods. Apart from other status improvement components; when snob individual is rejected for a hard-to-obtain goods, s/he largely responds to this (Matsibekker, 2009: 9). Who rejected snob individual for a hard-to-obtain goods is the seller of that goods and this rejection is the heart of the snob effect. If a consumer shows interest for a high level goods but cannot decide to buy, seller can approach to the consumer as a guiding friend. The seller, who learns about the consumer as the conversation progresses, may politely reject the consumer by saying that the goods is in a price range which cannot be afforded . If the customer is still interested in the goods, the seller, who actually intended to sell the goods, may sell the goods to the costumer by reducing its price to the lowest price possible. Because that goods has become a goods which gives a self-actualization feeling when it is purchased in the eye of the snob costumer. Snob individual thinks that his/her social status is improved when s/he purchases a goods which is actually unreachable for him/her. On the other hand, s/he would have made an expense in order to improve his/her social status, which is under pressure, even more (Rowe, 1990). Performed researches have showed that product supply limitation increases the value given to the product by costumers and affects their brand choices (Verhallen, 1982; Lynn, 1991; Pantzalis, 1995). According to Solomon (1994), while the goods with limited supply have higher values, the goods which can be easily found in the market are less desirable due to this characteristic. In the study carried out by Verhallen and Robben (1994), it was determined that the most significant effect on consumer demand to make individuals see a goods as popular, expensive and unique is product scarcity. Pantzalis (1995), in his study where he used expanded Bass model, examined the effects of goods with limited supply on two consumer groups. These groups are consisted of consumers with snob and bandwagon characteristics. In the study, it was deduced that the effects of brand prevalence on these two groups were connected to each other and the differentiation between two groups became clear according to social or cultural reasons. In another study (Coelho and Mcclure (1993)), for a monopoly firm, two different consumer groups were used and the snob effect in demand of the status goods was examined. In the model where consumption of a group does not affect another, markets are dividable and retail sale is applied; marginal costs are the same for each consumer group. Since it is not possible to purchase a goods from a market and to sell it in another, monopoly firm can make price discrimination. For this reason, monopoly determines a fixed price for each consumer. As it is also seen in Figure 4, the price in the market where the second group is included is higher than the price in the market where the first group is included. If stocking a goods increases purchasing amount, the snob effect should be included in the price discrimination. Suppose that two different consumer groups are divided into two parts as the first stage consumers and the second stage consumers. These first stage and second stage consumers may be the consumers within Group 1 or Group 2. The snob effect is between the first stage consumers and the second stage consumers. While the first stage consumers increase the amount of a goods that they purchase, the marginal value of that goods would gradually decrease for the second stage snob consumers. For this reason, consumption amounts of these two consumer groups come. Since trading cost is not high in some retail sale markets, organizations such as night clubs tend to restrict entrance of their customers in order to keep their fashionableness. Since fashionable goods are a social status symbol for their consumers, being able to enter these night clubs with restricted entrance is important for individuals. While
634
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
the number of the costumers who enter these night clubs increases, the value of that goods decreases in the eye of snob individuals. Therefore, increasing the current supply reduces the demand in the future. P1
P2
Group 1
Group 2
P2* P1* MC2
MC1 MR1 0
D1
Q1*
MR 2 Q1
0
Q2*
D2 Q2
Figure 4: Two different consumer groups and price discrimination (Coelho and Mcclure, 1993: 605)
The snob effect may increase the cost for monopoly seller at the first consumption stage. When production amount of Q1 When MC1, which is the first stage total marginal cost, is expressed as below; MC p1 indicates the marginal cost of the production at the first stage and dR2/dQ1 indicates the decrease in the profit at the second stage due to the increase in sale at the first stage. In fact, the decrease in the profit stated in dR2/dQ1 expression is a decrease in the present value and preferred in terms of easy expression. Along with increasing interest rate, the current value decrease would increase (Coelho and Mcclure 1993: 605). MC1 = MCp1 - dR2/dQ1
(1)
Equation (1) expresses that while the first stage production amount increases, the first stage total marginal cost would also increase and the profit at the second stage would decrease for this reason. This effect is shown in Figure 5. According to the Figure, the first stage equilibrium production Q 1** is lower than Q1* where there is no snob effect; P 1**, which is the equilibrium price, is higher than the price level where there is no snob effect. During pricing, monopoly firm knows that when it reduces the first stage production amount, the second stage sales amount would increase. Then, the snob effect causes marginal income and marginal cost differentiation between two consumption stages; because the snob effect is, in fact, the price increase at the first stage raising the amount of demand at the second stage. Ceteris paribus, increasing demand cause an increase in the sales amount as well. In other words, just like upward sloping demand curve, price increase of today turns into sale increase of tomorrow. In this case, it is expected that monopoly firm would determine the first stage sale price as P 1** (Coelho and Mcclure 1993: 606). Pantzalis (1995) showed that the brand privilege is one of the factors which positively affect the prestige goods demand. In addition to this, he stated that when high level brand supply is limited, this limitation turns into a status symbol transfer. According to Groth and McDaniel (1993), recognizing brands as privileged or unique is related to their production costs. According to these authors, privilege of having a brand position is that brands have higher prices than other goods. For this reason, they assert that prestige pricing strategy should be determined in marketing of high quality and luxury goods. Aislabie and Tisdell (1988) showed the price levels which can be determined by a monopoly firm according to flexibility of goods demand when such firm release its new product to the market.
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
635
P1 MCp1 dR2/dQ1
P1** P1*
MCp1 D1
MR1 0
Q1** Q1*
Q1 Figure 5: The first stage monopoly pricing (Coelho and Mcclure, 1993: 606)
Monopoly firm, while determining pricing strategy for its new product, accepts that it would face with a different demand curve in the market. The first demand curve is demand curve of the self-centered. These individuals are decisions of consumption. Other demand curves are demand curves of snob and bandwagon individuals. In Figure 6, the demand curve shown with ABG is a combination of snob and bandwagon demand. In ABG associated demand curve, while AB section indicates snob demand, BG section indicates bandwagon demand. In terms of flexibility value, demand curve of the self-centered has a higher value than snob demand and lower than bandwagon demand. For this reason, it is not seen in the associated demand curve. $ A P1
MC1 B J
P0
MC2
H
G K
0 x1
x2 x3
x4
x5
MC3 Q
Figure 6: Associated demand curve (Aislabie and Tisdell, 1988: 79)
Monopoly firm takes its decisions according to these two demand curves while creating pricing strategy. For the firm which intends to increase its profit to maximum, the associated demand curve derived from two demand curves is ABG curve. With this curve, the firm makes its marginal profit to be obtained from sale price of each goods maximum. The associated demand curve is given in Figure 6. As it is seen, the associated demand curve makes an angle at B point. Marginal income curve of this demand curve is shown with AHJK. Considering three different
636
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
marginal cost curves that the firm may face with, different strategies towards ensuring profit maximization could be evaluated. MC1 curve intersects with AH marginal income curve and it is the highest marginal cost curve. The price level where the profit is at maximum for the monopoly firm is P 1 where AH marginal income curve intersects with MC1 marginal cost curve. What makes the profit maximum at this price level is the firm managers adopting snob consumer oriented marketing strategy in product marketing. As a matter of fact, if marginal cots curve of a product is at a level as high as MC1, the only way to make profit from marketing the product is to benefit from the snob 2 and MC3 curves, where marginal cost curve is lower, intersect with the marginal income curve shown with JK and the firm can make its profit maximum by benefiting from bandwagon consumer behavior (Aislabie and Tisdell, 1988: 79). 3. Conclusion Luxury consumption goods have attracted individuals discussed in researches of economists and in studies where demand for luxury goods is examined, reasons and components of this demand is examined. Among these studies where demand for luxury goods is generally named as prestige seeking behavior, Vigneron and Johnson (1999) stated that demand for luxury goods consists of five components. These components are veblen effect, bandwagon effect, hedonic effect, perfectionist effect and snob effect. In his study, Leibenstein (1950) examined what kind of demand curve the snob consumer has. According to this, the snob consumer increases his/her purchasing behavior because s/he deems the increase in luxury goods prices as a prestige element. The retail seller, who knows this behavior pattern of the snob consumer, would apprehend better how s/he makes a luxury goods the only owner of the goods leads to expensive luxury goods to be purchased by the snob consumer. A luxury goods with limited supply creates the same effect on the snob consumer as well. A monopoly firm which produces a luxury goods may increase its marginal income by considering the snob effect while making price discrimination. On the other hand, monopoly firm which will release a new product to the market should know while making pricing strategy that it would appeal only to the snob consumer at a high marginal cost due to inelastic structure of the snob consumer demand. Hence the firm, even though marginal cost of its new product is high, may obtain profit by selling this goods to the snob consumer. References Aronson, E., & Linder D.(1965). Gain and loss of esteem as determinants of interpersonal attractiveness. Journal Of Experimental Social Psychology, 1, 156-172. Aislaie, C., J., & Tisdell, C. A. (1988). Profit maximization and marketing strategies: demand rotation and social influances. Managerel And Decision Economics, 9, 77-82. , 132/133 (2-3), 41-43. Bechtold, M. (1991). Le paradoxe du luxe. Beverland, M. (2004). Uncovering 'theories-in-use': building luxury wine brands. European Journal Of Marketing, 38, 446-466. Brehm, S., S., & Brehm, J. W.(1981). Psychological reactance: a theory of freedom and control. New York: Academic Press. Brunstein, J., C., & Gollwitzer, P., M. (1996). Effects of failure on subsequent performance: the importance of self-defining goals. Journal Of Personality And Social Psychology, 70, 395-407. Chadha, R., & Husband P. (2006). The cult of the luxury brand: inside asia's love affair with luxury, Londra: Nicholes Brealey. Coelho, R., P., & Mcclure, J., E. (1993) Toward an economic theory of fashion. Economic Inquiry, 31- 595-608. Dataminotor (2002). The prestige consumption. Market Research Report, Product Code R313-4377, Datamonitor, September, London. Deeter-Schmelz, D., Dawn, R., Moore, J., Goebel, D., & Solomon, P. (1995), Measuring the prestige profiles of consumers: a preliminary report of the PRECON scale, in Engelland, B. and Smart, D. (Eds), Marketing foundations for a changing world: proceedings of the annual meeting of the southern marketing association (pp. 395-9), Orlando: Southern Marketing Association. Dubois, B., & Paternault, C. (1997). Does luxury have a home country? an investigation of country images in europe. Marketing And Research Today, 25, 79-85. Dubois, B. & Laurent, G. (1994). Attitudes toward the concept of luxury: an exploratory analysis. Siew Meng Leong & Joseph A. Cote, asiapacific advances in consumer research (pp. 273-278), UT : Association for Consumer Research.
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
637
Dubois, B. & Laurent, G. (1996). Le luxe par-dela les frontieres: une etude exploratoire dans douze pays. Decisions Marketing, 9, 35-43. Dubois, B. & Duquesne, P. (1999). Polarization maps: a new approach to identifying and assessing compettitive position-the case of luxury brands. Marketing And Research Today, 21, 115-123. World gazette), 17.10.2011. Elliott, R. (1994). Addictive consumption: function and fragmentation in postmodernity. Journal Of Consumer Policy, 17, 159-179. Friese, S. & Koenig H. (1993). Shopping for trouble. Advancing The Consumer Interest, 5, 24-29. Gollwitzer, P., M. (1986), Striving for specific identities: the social reality of self-symbolizing, R. Baumeister (Eds), Private self and public self (pp. 143 159). New York: Springer. Gollwitzer, P., M., & Wicklund, R., A. (1985). Self-symbolizing and the neglect of others' perspective. Journal Of Personality And Social Psychology, 48, 702-715. Gronmo, S. (1988). Compensatory consumer behavior: elements of a critical sociology of consumption, New York:Humanities Press. Grossman, G.M. & Sharpiro, C. (1988). Counterfeit-product trade. The American Economic Review, 78, 59-75. Groth, J. & Mcdaniel, S., W. (1993). Hedonic consumption: emerging concepts, methods and propositions. Journal Of Marketing, 10, 10-16. Heller, J. F., Pallak, M. S., & Picek, J., M. (1973). The interactive effects of intent and threat on boomerang attitude change. Journal Of Personality And Social Psychology, 26, 273-279. Husic, M., & Cicic, M. (2009). Luxury consumption factors. Journal Of Fashion Marketing And Mamagement, 13, 231-245. Keasbey, L., M. (1903). Prestige value. Quarterly Journal Of Economics, 17, 456-475. Leibenstein, H. (1950). Bandwagon, snob ve veblen effects in the theory of consumers' demand. Quarterly Journal Of Economics, 64, 183-207. Luxury Institute (2006). Luxury institute report. New York:Luxury Instutite, Lynn, M. (1991). Scarsity effects on value: a quantitative review of the commodity theory literature. Psychology And Marketing, 8, 45-57. Basic And Applied Social Psychology, 13, 67-78. Mason, R., S. (1992). Modelling the demand for status goods. Working Paper, Department Of Business And Management Studies, University Of Salford, UK. Matsibekker, C., L., Z., (2009). The snob effect: the psychology of negotiation tactics in the salesroom. Unpublished Ph.D. Dissertation, University of New York, New York. Merrill Lynch & Cap Gemini (2005), World wealth report 2005, Merrill Lynch & Cap Gemini, New York. Moore, C. & Birtwistle, G. (2005). The nature of parenting advantage in luxury fashion retailing- the case of gucci group nv", International Journal Of Retail & Distribution Management, 33, 256-270. clothing. Journal Of Economic Psychology, 21, 545-576. Pantzalis, I. (1995). Exclusivity strategies in pricing and brand extension. Unpublished Ph.D. Dissertation, University of Arizona, Arizona.. Phau, I., & Prendergast, G. (2001). Consumption luxury brands: the relevance of the 'rarity principle. Journal Of Brand Management, 8, 122-138. Rae, J. (1834). The sociological theory of capital. New York:Macmillan. Rees, P. (1997). Shopping binge on luxury. The Sunday Telegraph, September 21, pp 8. Rogers, E., M. (1983). Diffusion of innovations. New York: The Free Press. Roux, E. (1994). Le luxe: entre prestige et marche de masse. Decisions Marketing, 132/133, 12-13. Roux, E. (1995). Consumer evaluation of luxury brand extensions, in Proceedings of the European Marketing Academy, ESSEC: Cergy-Pontoise, France, pp. 1971-1980. Decisions Marketing, 9: 15-23. Rowe, M. (1990). Barriers to equality: the power of subtle discrimination to maintain unequal opportunity. Employee Responsibilities And Rights Journal, 3, 153-163. Solomon, M., R. (1994). Consumer behavior. Boston:Ma.: Allyn And Bacon. Synder, C., R., & Fromkin, H., L. (1977). Abnormality as a positive characteristic: the development and validation of a scale measuring need for uniqueness. Journal Of Abnormal Psychology, 86, 518-527. The Boston Consulting Group (2010). The new world of luxury, caught between growing momentum and lasting change.(http://www.bcg.com/documents/ file67444.pdf), (15.10.2011). The Economist (2002). Special report: luxury goods. The Economist, 23, 61-63. Tybout, A., M., & Artz, N. (1994). Consumer psychology. Annual Review Of Psychology, 45, 131-169. Veblen, T., B., (1899). The theory of the leisure class. Boston:Houghton Mifflin. Verhallen, T., M., (1982).Scarsity and consumer choice behavior. Journal Of Economic Psychology, 2, 299-321. Verhallen, T., M., & Robben H., S. (1994) Scarcity and preference: an experiment on unavailability and product evaluation. Journal Of Economic Psychology, 15, 315-331. Vigneron, F. & Johnson, L. (1999). A review and a conceptual framework of prestige-seeking consumer behavior. Academy Of Marketing Science Review, www.Amsreview.Org/Articles/Vigneron01-1999.Pdf (09.10.2010). Wicklund, R., A., & Gollwitzer, P., M. (1982). Symbolic self-completion. New Jersey:Hillsdale. Wright, R., A., & Contrada, R., J. (1986). Dating selectivity and interpersonal attraction: toward a better understanding of the 'elusive phenomenon'. Journal Of Social And Personel Relationships, 3, 131-148.
Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
WC-BEM 2012
The snop effect in the consumption of luxury goods Ergin Uzgoren*a, Taner Guney b a
Department of Economics,Dumlupinar University, Kutahya P.O .Box 43000, Turkey Department of Foreign Trade,Dumlupinar University, Kutahya P.O .Box 43700, Turkey
b
Abstract Despite the global crisis in the world the importance of the consumption of luxury goods is not reduced. This situation makes the examination of the various aspects of the consumption of luxury goods interesting. In this study, we primarily focused on the definition and effects related to the consumption of luxury goods in general theoretical framework. Then one of the effects of commodity price increases, which decreases the accessibility of the individual to increase the consumption of luxury goods, which expresses the snop effect is studied in detail. In this study, basic elements of a consumer's consumption of goods as a result of snop effects are taken into account, and also a monopoly firm's strategies to meet the snop goods demand is tried to be evaluated. © 2012 Elsevier Ltd.Ltd. Selection and/or peer review under under responsibility of Prof. Dr. Huseyin © 2012Published Publishedbyby Elsevier Selection and/or peer review responsibility of Prof. Dr. Arasli Hüseyin Arasli
Keywords: Luxury goods; snob effect; consumption; goods; consumer;
1. Introduction Since mankind has been trying to please itself with the presence of fine goods for centuries, luxurious goods * have been an intensive point of interest and discussion. When compared to the past, today some consumers have a high income level with which they can make more discretionary consumption expenditure. Although they have demonstrated a balanced increase within income hierarchy, they are significantly ranked at the top social classes. It is apparent that today these consumers are willing to make rather high remunerations for luxurious goods (Husic and Cicic, 2009: 231). The world luxurious goods market has increased to 68 billion dollars in 2000 from 20 billion dollar level in 1985, by demonstrating a constant growth despite September 11 th attacks and other incidents that disrupt global trade (The Economist: 2002). For example, according to The Sunday Telegraph import of Australia in 1996 showed an increase of 1130% in mink fur and 27.5% in diamond when compared to the previous year. The demand of Australians for fur, diamond, champagne and caviar in particular has displayed a great increase during this period (Rees, 1997:8). The improvement of USA economy in 1997 and the rapid increasing demand of Asian countries lead to the rapid growth of luxurious goods market in early 2000s. The number of millionaires has increased so much that richness is not measured with millions anymore. In 2004, there were 8.3 million rich people in the world, 7.5 million of which had a house in USA and 425 thousand of which resided in the Great Britain (Merrill Lynch &Cap Gemini, 2005). * -274-265-2193; fax: +0-274-265-2197. E-mail address: [email protected] *
1877-0428 © 2012 Published by Elsevier Ltd. Selection and/or peer review under responsibility of Prof. Dr. Hüseyin Arasli doi:10.1016/j.sbspro.2012.09.105
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
629
Additionally in the 2006 Market Research Report prepared for the Europe (Datamonitor, 2002), it was estimated that there would be a consumer group which exceeds 27 million people who would acquire personal income more than 50,000 Euros per year in order to be spent for luxurious consumption. These data supports the significance of luxurious goods market and its strong tendency to constant growth. owned by individuals who consist 2% of the wealthy. Such rich people reside in North America, Europe, Japan and (LuxuryInstitute, 2006). In 2004 236 thousand people in China and 61 thousand people in India have become millionaires (Merrill Lynch &Cap Gemini, 2005). 37% of luxurious goods consumption occurs in Asia, 35% in Europe, 24% in USA and the remaining 4% occurs in other regions (Chadha and Husband, 2006). prepared by the Boston ConsultingGroup (BCG), world luxurious consumption market has reached trade volume of 1 trillion Euros by growing nearly 13% in 2010. According to this report, among luxurious expenditure; luxurious travel and accommodation is ranked first with 270 billion Euros, luxurious cars are ranked second with 250 billion Euros, luxurious technology products are ranked third with 100 billion Euros. Furthermore, it was concluded in the report that 4 main tendencies are prominent in luxurious goods market. According to this fact, customers want luxurious experience rather than showy luxurious products. Luxury is shifting to developing markets. While luxurious consumption has been associated with centers such as London, Paris, New York, Milan and Tokyo until now, today this situation is rapidly changing. Markets such as China, Russia and Gulf Countries are becoming luxurious consumption centers. According to the report which states that the share of Turkey in luxury market is 0.5 percent, the difference between luxury brands and nonluxury brands is decreasing; the consumers are moving both up and down between segments (BCG, 2010). According to a study conducted for Italian luxury goods producers federation Fondazione Altagamma by market study company Bain&Company, it was determined that despite the problems in the global economy, the luxury consumption sector would not encounter any significant problems. With the influence of the Asian market, China in particular, it is estimated that the sector would grow by 10% in 2011. According to the study, it is anticipated that in 2011 the sector would grow by 29% in China, Hong Kong, Macao and Taiwan and by 25% in Asia-Pacific region World gazette), 17.10.2011). It is seen that the first studies in literature towards examining luxury goods consumption behavior of the consumers were conducted by Rae (1834), Veblen (1899) and Keasbey (1903). Then, the studies, especially the ones in marketing literature, were focused on luxurious brands, expansion of brands in particular, (Roux, 1995), competitive management in mass marketing and luxury goods principles (Bechtold, 1991; Roux, 1994; Roux and Floch, 1996), and measurement of reactions against the idea of luxury goods (Dubois and Duguesne, 1993; Dubois and Laurent, 1994). Whereas in 2000s, due to luxury goods market gaining a new dimension with the unique demand coming from Asian and Western communities, the conducted studies mainly focused on inter-societal culture differences that affect the idea of luxury goods and luxury goods concept created by such differences (Dubois and Laurent, 1996; Dubois and Paternault, 1997). Traditionally luxury goods are defined as goods for which the usage or display of a particular branded product provides prestige to its owner along with any functional utility (Grossman and Sharpiro, 1988). Deeter-Schmelz et of store type and atmosphere, merchandise price and quality as well as branding and fashion combine to create a offer the individual to have a well-known brand identity, enjoy high brand awareness and perceived quality. Therefore, they assumed luxury brands retain sales levels and customer loyalty. Similarly, Beverland (2004) created a luxury brand model with the following dimensions: Product robustness The value of the product for the consumer Culture History of the product Marketing and
630
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
Support Moore and Birtwistle (2006) are critical towards this model and suggest that more details are needed in order to build a modern luxury brand. Vigneron and Johnson (1999) defined 5 values of prestige behavior combined with 5 significant motivations and (1999) categorization of luxury products hedonists and perfectionists are more interested in pleasure (enjoyment, benefit) derived from the consumption of luxury products. Therefore, they are less interested in the price than quality, product properties and consumption performance. The price only serves as a proof of quality for these consumers; and they know what they want and use their own consumption judgment. Veblen, snob and bandwagon effects arise from the importance associated with the price of the goods by the consumer because a higher price establishes a higher prestige level for these consumers. Therefore, according to Veblen, snob and bandwagon consumers are individuals who perceive the price as the most important factor. They usually buy rare products and emphasize their status in this way. Vigneron and Johnson explain luxury consumption according to the effects detailed below. The Veblen Effect (perceived conspicuous value): Since the primary aim of Veblen consumers is to impress others, they accept price as an indicator of prestige and attach great importance to it. Therefore, they increase their demand as the price of the product increases. The Snob Effect (perceived unique value): Snob consumers see the price as an indicator of privilege and avoid using popular brands in order to have an inner-directed consumption experience, i.e. the need to be the only consumer of a product. The Bandwagon effect (perceived social value): Similar to Snob consumers, bandwagon consumers attach less importance to price as an indicator of prestige, but place greater emphasis on the effect they make on others while consuming prestige brands as an indicator of prestige. The Hedonic effect (perceived emotional value): Hedonist consumers are more interested in their own feelings and pleasure, and therefore attach less importance to price as an indicator of prestige. The Perfectionism effect (perceived quality value): Perfectionist consumers rely on their own perception of product quality and may use price as a further proof of quality. Variables and their significant characteristics effecting luxury goods consumption are shown in Figure 1. While veblen, snob and bandwagon consumers are influenced by social values, hedonist and perfectionist consumers are influenced by personal values.
Social Influences
Personal Influences
Conspicuous Perception
Pomposity
Veblen
Uniqueness Perception
Uniqueness
Snob
Social Value Perception
Harmony
Bandwagon
Emotional Value Perception
Self-Fulfillment
Hedonist
Assurance
Perfectionist
Quality Value Perception
Figure 1: Social and personal influences in luxury consumption (Vigneron and Johnson, 1999:8)
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
631
2. Snob Effect in Luxury Consumption Even though some authors consider that Veblen effect is similar to snob effect, as explained above, in Veblen effect the individual tends to buy more from a product, price of which has risen, in order to impress others. However Snob effect is more complicated because Snob effect, which has been defined by Leibenstein, (1950) contains both social and personal influences. During consumption or purchase of a brand product for prestige purposes snob effect affects the behavior of other individuals and becomes influenced from behaviors of other individuals in addition to social and personal factors (Mason, 1992). The behavior types as per perception and price variables of factors that affect luxury consumption are shown in Figure 2.
Private A w a r e n e s s
Hedonist & Perfectionist
Bandwagon
Snob
Veblen
General Low
High
Importance of Price Perception as an Indicator of Prestige Figure 2: Prestige seeking consumer behavior (Vigneron and Johnson, 1999:4)
As also clearly seen in the Figure, the importance attached to the price is high and importance attached to being recognized is low, in other words the emphasis is not on being the only owner of the goods in Veblen effect. Even though other individuals own the high priced goods, the demand of the individual to such goods will not change in Veblen effect. However in snob effect the importance attached to the price is high as in Veblen, but motivation for being recognized is towards separation from other individuals and being the only owner of the goods. Therefore when other individuals also own high priced goods, snob individual will decrease its demand for those goods. In his study Leibenstein (1950) examined what kind of a demand curve a snob consumer might have. According to the demand curve shown in Figure 3, while the price of a product which appeals to snobs is P2, the market demand for such product is Da and the amount desired to be purchased is a. When E a is at the balance point and when the price of the product drops to P 1, the amount of the product desired to be purchased increase according to Da demand curve. Nevertheless, with the decrease in the price of the product, the product being consumed more in the society would upset individuals who feel as snob. Therefore the interest of snobs to the product decreases and their demand shifts to the left. In case the market price continues to decrease, the interest of snobs in the product will gradually decrease and demand function will shift to the left again. In this way, with each decrease in price the increase in the amount of product demanded will remain below the anticipated increase in demand as a result of the demand of snobs to the product. As a result of the demand of the snobs to the product decreasing as the price of the product decreases (Da, Db, Dc points that show the amount of product that snobs want to buy (E a, Eb, Ec from each new price are combined the demand curve of the snobs would appear. As seen in Figure 3 the demand of
632
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
snobs in Ds form is less flexible when compared to market demand. Snob effect occurs as a result of two factors. The first factor: when a new luxury/prestige product is introduced, snob consumer thinks that by buying such luxury product at that moment s/he would prevent other individuals from buying that product. This factor is also pronounced by Rogers (1983). Second factor: occurs when a consumer that places importance on his/her status does not see a product as a special product and refuses it. Because according to the snob consumer, this product is being consumed by the majority of the society (Mason, 1981). These arguments are also supported by psychologists. According to Snyder and Fromkin (1977), due to need for uniqueness, individuals may determine their consumption behavior in accordance with such need in order to meet the desire to distinguish themselves from other individuals. P
Ea
P2
Eb
P1 Ec
Da Ed
Db E
e
Dc Dd De
0
a
b
c
d,x
e
Q
Figure 3: Snob consumer demand curve (Leibenstein, 1950: 201)
Similarly Matsibekker (2009) stated in his study, in which he examined how a product would be sold to a consumer with snob characteristics, that a product may become a product appealing to the snob individual by emphasizing the personal characteristics that snobs have. In order to achieve that, a seller may adopt a rude attitude to the extent that s/he judges the social status of an individual with snob consumer characteristics. The individual, whose social status is judged, feels the urge to prove his/her social status by buying a product which s/he cannot afford with his/her financial condition at that moment. Thus s/he transforms each purchase decision to an incident by which s/he can prove his/her identity and status. This is what snob effect is (Matsibekker, 2009: 4). Although conventional consumption surveys start from the idea that individuals buy only required goods (Tybout and Artz, 1994), this psychological response given to seller by snob individual might be the most basic theory of the snob effect (Brehm and Brehm, 1981). If sellers act excessively insistent while trying to convince the consumers who give importance to their personal freedom and status, these consumers may decide not to buy the goods in order to keep their personal freedom (Heller et al., 1973). So, the snob effect provides opportunity to an individual to prove his/her status in exchange for the goods to be bought, by criticizing social status of the individual through slight offences and polite rejects (Matsibekker, 2009: 4). A symbolic need to spend within self-actualization act of an individual may be another snob behavior (Wicklund and Gollwitzer, 1982; Gollwitzer and Wicklund, 1985; Brunstein and Gollwitzer, 1996). This is called compensatory consumption. In marketing literature, compensatory consumption can be defined as consumption of any goods in order to fill a deficiency in another field (Gronmo, 1988). In terms of snob individual, compensatory consumption means buying expensive goods in order to fill the deficiency of richness and status. In this buying process, snob individual thinks that s/he would get rich more by spending more money (Elliott, 1994; Friese and Koenig, 1993). For snob individual, compensatory consumption for symbolic purposes can also be behavior of
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
633
improving the values that s/he deems as a threat for her/his status (Wicklund and Gollwitzer, 1982). Snob individual may actualize this improvement by buying the goods which accurately define his/her status and identity (Gollwitzer, 1996). Power of the snob effect may be resulting from the impact created upon the individual by rejecting his/her desire to improve his/her status. This effect type is called rejection of improving status effect. In relation literature, individuals who could response this kind of effect are defined as extremely selective people who prefer the goods which are hard to buy, rather than conventional style individuals (Aronson and Linder, 1965; Wright and Contrada, 1986). The goods which are hard to buy are actually scarce goods. Scarcity raises the value and price of that goods by raising its desirability level (Lynn, 1992). These goods which are harder to obtain may provide advantage to the individual up to a certain status. Being at the top of the unending waiting lists or obtaining a goods which is regularly advertised and can be obtained only by a few elite people can be given as examples. Individual attaches higher importance to and have more respect for this kind of goods. Apart from other status improvement components; when snob individual is rejected for a hard-to-obtain goods, s/he largely responds to this (Matsibekker, 2009: 9). Who rejected snob individual for a hard-to-obtain goods is the seller of that goods and this rejection is the heart of the snob effect. If a consumer shows interest for a high level goods but cannot decide to buy, seller can approach to the consumer as a guiding friend. The seller, who learns about the consumer as the conversation progresses, may politely reject the consumer by saying that the goods is in a price range which cannot be afforded . If the customer is still interested in the goods, the seller, who actually intended to sell the goods, may sell the goods to the costumer by reducing its price to the lowest price possible. Because that goods has become a goods which gives a self-actualization feeling when it is purchased in the eye of the snob costumer. Snob individual thinks that his/her social status is improved when s/he purchases a goods which is actually unreachable for him/her. On the other hand, s/he would have made an expense in order to improve his/her social status, which is under pressure, even more (Rowe, 1990). Performed researches have showed that product supply limitation increases the value given to the product by costumers and affects their brand choices (Verhallen, 1982; Lynn, 1991; Pantzalis, 1995). According to Solomon (1994), while the goods with limited supply have higher values, the goods which can be easily found in the market are less desirable due to this characteristic. In the study carried out by Verhallen and Robben (1994), it was determined that the most significant effect on consumer demand to make individuals see a goods as popular, expensive and unique is product scarcity. Pantzalis (1995), in his study where he used expanded Bass model, examined the effects of goods with limited supply on two consumer groups. These groups are consisted of consumers with snob and bandwagon characteristics. In the study, it was deduced that the effects of brand prevalence on these two groups were connected to each other and the differentiation between two groups became clear according to social or cultural reasons. In another study (Coelho and Mcclure (1993)), for a monopoly firm, two different consumer groups were used and the snob effect in demand of the status goods was examined. In the model where consumption of a group does not affect another, markets are dividable and retail sale is applied; marginal costs are the same for each consumer group. Since it is not possible to purchase a goods from a market and to sell it in another, monopoly firm can make price discrimination. For this reason, monopoly determines a fixed price for each consumer. As it is also seen in Figure 4, the price in the market where the second group is included is higher than the price in the market where the first group is included. If stocking a goods increases purchasing amount, the snob effect should be included in the price discrimination. Suppose that two different consumer groups are divided into two parts as the first stage consumers and the second stage consumers. These first stage and second stage consumers may be the consumers within Group 1 or Group 2. The snob effect is between the first stage consumers and the second stage consumers. While the first stage consumers increase the amount of a goods that they purchase, the marginal value of that goods would gradually decrease for the second stage snob consumers. For this reason, consumption amounts of these two consumer groups come. Since trading cost is not high in some retail sale markets, organizations such as night clubs tend to restrict entrance of their customers in order to keep their fashionableness. Since fashionable goods are a social status symbol for their consumers, being able to enter these night clubs with restricted entrance is important for individuals. While
634
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
the number of the costumers who enter these night clubs increases, the value of that goods decreases in the eye of snob individuals. Therefore, increasing the current supply reduces the demand in the future. P1
P2
Group 1
Group 2
P2* P1* MC2
MC1 MR1 0
D1
Q1*
MR 2 Q1
0
Q2*
D2 Q2
Figure 4: Two different consumer groups and price discrimination (Coelho and Mcclure, 1993: 605)
The snob effect may increase the cost for monopoly seller at the first consumption stage. When production amount of Q1 When MC1, which is the first stage total marginal cost, is expressed as below; MC p1 indicates the marginal cost of the production at the first stage and dR2/dQ1 indicates the decrease in the profit at the second stage due to the increase in sale at the first stage. In fact, the decrease in the profit stated in dR2/dQ1 expression is a decrease in the present value and preferred in terms of easy expression. Along with increasing interest rate, the current value decrease would increase (Coelho and Mcclure 1993: 605). MC1 = MCp1 - dR2/dQ1
(1)
Equation (1) expresses that while the first stage production amount increases, the first stage total marginal cost would also increase and the profit at the second stage would decrease for this reason. This effect is shown in Figure 5. According to the Figure, the first stage equilibrium production Q 1** is lower than Q1* where there is no snob effect; P 1**, which is the equilibrium price, is higher than the price level where there is no snob effect. During pricing, monopoly firm knows that when it reduces the first stage production amount, the second stage sales amount would increase. Then, the snob effect causes marginal income and marginal cost differentiation between two consumption stages; because the snob effect is, in fact, the price increase at the first stage raising the amount of demand at the second stage. Ceteris paribus, increasing demand cause an increase in the sales amount as well. In other words, just like upward sloping demand curve, price increase of today turns into sale increase of tomorrow. In this case, it is expected that monopoly firm would determine the first stage sale price as P 1** (Coelho and Mcclure 1993: 606). Pantzalis (1995) showed that the brand privilege is one of the factors which positively affect the prestige goods demand. In addition to this, he stated that when high level brand supply is limited, this limitation turns into a status symbol transfer. According to Groth and McDaniel (1993), recognizing brands as privileged or unique is related to their production costs. According to these authors, privilege of having a brand position is that brands have higher prices than other goods. For this reason, they assert that prestige pricing strategy should be determined in marketing of high quality and luxury goods. Aislabie and Tisdell (1988) showed the price levels which can be determined by a monopoly firm according to flexibility of goods demand when such firm release its new product to the market.
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
635
P1 MCp1 dR2/dQ1
P1** P1*
MCp1 D1
MR1 0
Q1** Q1*
Q1 Figure 5: The first stage monopoly pricing (Coelho and Mcclure, 1993: 606)
Monopoly firm, while determining pricing strategy for its new product, accepts that it would face with a different demand curve in the market. The first demand curve is demand curve of the self-centered. These individuals are decisions of consumption. Other demand curves are demand curves of snob and bandwagon individuals. In Figure 6, the demand curve shown with ABG is a combination of snob and bandwagon demand. In ABG associated demand curve, while AB section indicates snob demand, BG section indicates bandwagon demand. In terms of flexibility value, demand curve of the self-centered has a higher value than snob demand and lower than bandwagon demand. For this reason, it is not seen in the associated demand curve. $ A P1
MC1 B J
P0
MC2
H
G K
0 x1
x2 x3
x4
x5
MC3 Q
Figure 6: Associated demand curve (Aislabie and Tisdell, 1988: 79)
Monopoly firm takes its decisions according to these two demand curves while creating pricing strategy. For the firm which intends to increase its profit to maximum, the associated demand curve derived from two demand curves is ABG curve. With this curve, the firm makes its marginal profit to be obtained from sale price of each goods maximum. The associated demand curve is given in Figure 6. As it is seen, the associated demand curve makes an angle at B point. Marginal income curve of this demand curve is shown with AHJK. Considering three different
636
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
marginal cost curves that the firm may face with, different strategies towards ensuring profit maximization could be evaluated. MC1 curve intersects with AH marginal income curve and it is the highest marginal cost curve. The price level where the profit is at maximum for the monopoly firm is P 1 where AH marginal income curve intersects with MC1 marginal cost curve. What makes the profit maximum at this price level is the firm managers adopting snob consumer oriented marketing strategy in product marketing. As a matter of fact, if marginal cots curve of a product is at a level as high as MC1, the only way to make profit from marketing the product is to benefit from the snob 2 and MC3 curves, where marginal cost curve is lower, intersect with the marginal income curve shown with JK and the firm can make its profit maximum by benefiting from bandwagon consumer behavior (Aislabie and Tisdell, 1988: 79). 3. Conclusion Luxury consumption goods have attracted individuals discussed in researches of economists and in studies where demand for luxury goods is examined, reasons and components of this demand is examined. Among these studies where demand for luxury goods is generally named as prestige seeking behavior, Vigneron and Johnson (1999) stated that demand for luxury goods consists of five components. These components are veblen effect, bandwagon effect, hedonic effect, perfectionist effect and snob effect. In his study, Leibenstein (1950) examined what kind of demand curve the snob consumer has. According to this, the snob consumer increases his/her purchasing behavior because s/he deems the increase in luxury goods prices as a prestige element. The retail seller, who knows this behavior pattern of the snob consumer, would apprehend better how s/he makes a luxury goods the only owner of the goods leads to expensive luxury goods to be purchased by the snob consumer. A luxury goods with limited supply creates the same effect on the snob consumer as well. A monopoly firm which produces a luxury goods may increase its marginal income by considering the snob effect while making price discrimination. On the other hand, monopoly firm which will release a new product to the market should know while making pricing strategy that it would appeal only to the snob consumer at a high marginal cost due to inelastic structure of the snob consumer demand. Hence the firm, even though marginal cost of its new product is high, may obtain profit by selling this goods to the snob consumer. References Aronson, E., & Linder D.(1965). Gain and loss of esteem as determinants of interpersonal attractiveness. Journal Of Experimental Social Psychology, 1, 156-172. Aislaie, C., J., & Tisdell, C. A. (1988). Profit maximization and marketing strategies: demand rotation and social influances. Managerel And Decision Economics, 9, 77-82. , 132/133 (2-3), 41-43. Bechtold, M. (1991). Le paradoxe du luxe. Beverland, M. (2004). Uncovering 'theories-in-use': building luxury wine brands. European Journal Of Marketing, 38, 446-466. Brehm, S., S., & Brehm, J. W.(1981). Psychological reactance: a theory of freedom and control. New York: Academic Press. Brunstein, J., C., & Gollwitzer, P., M. (1996). Effects of failure on subsequent performance: the importance of self-defining goals. Journal Of Personality And Social Psychology, 70, 395-407. Chadha, R., & Husband P. (2006). The cult of the luxury brand: inside asia's love affair with luxury, Londra: Nicholes Brealey. Coelho, R., P., & Mcclure, J., E. (1993) Toward an economic theory of fashion. Economic Inquiry, 31- 595-608. Dataminotor (2002). The prestige consumption. Market Research Report, Product Code R313-4377, Datamonitor, September, London. Deeter-Schmelz, D., Dawn, R., Moore, J., Goebel, D., & Solomon, P. (1995), Measuring the prestige profiles of consumers: a preliminary report of the PRECON scale, in Engelland, B. and Smart, D. (Eds), Marketing foundations for a changing world: proceedings of the annual meeting of the southern marketing association (pp. 395-9), Orlando: Southern Marketing Association. Dubois, B., & Paternault, C. (1997). Does luxury have a home country? an investigation of country images in europe. Marketing And Research Today, 25, 79-85. Dubois, B. & Laurent, G. (1994). Attitudes toward the concept of luxury: an exploratory analysis. Siew Meng Leong & Joseph A. Cote, asiapacific advances in consumer research (pp. 273-278), UT : Association for Consumer Research.
Ergin Uzgoren and Taner Guney / Procedia - Social and Behavioral Sciences 62 (2012) 628 – 637
637
Dubois, B. & Laurent, G. (1996). Le luxe par-dela les frontieres: une etude exploratoire dans douze pays. Decisions Marketing, 9, 35-43. Dubois, B. & Duquesne, P. (1999). Polarization maps: a new approach to identifying and assessing compettitive position-the case of luxury brands. Marketing And Research Today, 21, 115-123. World gazette), 17.10.2011. Elliott, R. (1994). Addictive consumption: function and fragmentation in postmodernity. Journal Of Consumer Policy, 17, 159-179. Friese, S. & Koenig H. (1993). Shopping for trouble. Advancing The Consumer Interest, 5, 24-29. Gollwitzer, P., M. (1986), Striving for specific identities: the social reality of self-symbolizing, R. Baumeister (Eds), Private self and public self (pp. 143 159). New York: Springer. Gollwitzer, P., M., & Wicklund, R., A. (1985). Self-symbolizing and the neglect of others' perspective. Journal Of Personality And Social Psychology, 48, 702-715. Gronmo, S. (1988). Compensatory consumer behavior: elements of a critical sociology of consumption, New York:Humanities Press. Grossman, G.M. & Sharpiro, C. (1988). Counterfeit-product trade. The American Economic Review, 78, 59-75. Groth, J. & Mcdaniel, S., W. (1993). Hedonic consumption: emerging concepts, methods and propositions. Journal Of Marketing, 10, 10-16. Heller, J. F., Pallak, M. S., & Picek, J., M. (1973). The interactive effects of intent and threat on boomerang attitude change. Journal Of Personality And Social Psychology, 26, 273-279. Husic, M., & Cicic, M. (2009). Luxury consumption factors. Journal Of Fashion Marketing And Mamagement, 13, 231-245. Keasbey, L., M. (1903). Prestige value. Quarterly Journal Of Economics, 17, 456-475. Leibenstein, H. (1950). Bandwagon, snob ve veblen effects in the theory of consumers' demand. Quarterly Journal Of Economics, 64, 183-207. Luxury Institute (2006). Luxury institute report. New York:Luxury Instutite, Lynn, M. (1991). Scarsity effects on value: a quantitative review of the commodity theory literature. Psychology And Marketing, 8, 45-57. Basic And Applied Social Psychology, 13, 67-78. Mason, R., S. (1992). Modelling the demand for status goods. Working Paper, Department Of Business And Management Studies, University Of Salford, UK. Matsibekker, C., L., Z., (2009). The snob effect: the psychology of negotiation tactics in the salesroom. Unpublished Ph.D. Dissertation, University of New York, New York. Merrill Lynch & Cap Gemini (2005), World wealth report 2005, Merrill Lynch & Cap Gemini, New York. Moore, C. & Birtwistle, G. (2005). The nature of parenting advantage in luxury fashion retailing- the case of gucci group nv", International Journal Of Retail & Distribution Management, 33, 256-270. clothing. Journal Of Economic Psychology, 21, 545-576. Pantzalis, I. (1995). Exclusivity strategies in pricing and brand extension. Unpublished Ph.D. Dissertation, University of Arizona, Arizona.. Phau, I., & Prendergast, G. (2001). Consumption luxury brands: the relevance of the 'rarity principle. Journal Of Brand Management, 8, 122-138. Rae, J. (1834). The sociological theory of capital. New York:Macmillan. Rees, P. (1997). Shopping binge on luxury. The Sunday Telegraph, September 21, pp 8. Rogers, E., M. (1983). Diffusion of innovations. New York: The Free Press. Roux, E. (1994). Le luxe: entre prestige et marche de masse. Decisions Marketing, 132/133, 12-13. Roux, E. (1995). Consumer evaluation of luxury brand extensions, in Proceedings of the European Marketing Academy, ESSEC: Cergy-Pontoise, France, pp. 1971-1980. Decisions Marketing, 9: 15-23. Rowe, M. (1990). Barriers to equality: the power of subtle discrimination to maintain unequal opportunity. Employee Responsibilities And Rights Journal, 3, 153-163. Solomon, M., R. (1994). Consumer behavior. Boston:Ma.: Allyn And Bacon. Synder, C., R., & Fromkin, H., L. (1977). Abnormality as a positive characteristic: the development and validation of a scale measuring need for uniqueness. Journal Of Abnormal Psychology, 86, 518-527. The Boston Consulting Group (2010). The new world of luxury, caught between growing momentum and lasting change.(http://www.bcg.com/documents/ file67444.pdf), (15.10.2011). The Economist (2002). Special report: luxury goods. The Economist, 23, 61-63. Tybout, A., M., & Artz, N. (1994). Consumer psychology. Annual Review Of Psychology, 45, 131-169. Veblen, T., B., (1899). The theory of the leisure class. Boston:Houghton Mifflin. Verhallen, T., M., (1982).Scarsity and consumer choice behavior. Journal Of Economic Psychology, 2, 299-321. Verhallen, T., M., & Robben H., S. (1994) Scarcity and preference: an experiment on unavailability and product evaluation. Journal Of Economic Psychology, 15, 315-331. Vigneron, F. & Johnson, L. (1999). A review and a conceptual framework of prestige-seeking consumer behavior. Academy Of Marketing Science Review, www.Amsreview.Org/Articles/Vigneron01-1999.Pdf (09.10.2010). Wicklund, R., A., & Gollwitzer, P., M. (1982). Symbolic self-completion. New Jersey:Hillsdale. Wright, R., A., & Contrada, R., J. (1986). Dating selectivity and interpersonal attraction: toward a better understanding of the 'elusive phenomenon'. Journal Of Social And Personel Relationships, 3, 131-148.