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Spending on bling: What explains the demand for status goods?

Martin Kanz's picture

When people spend money, their decisions are often influenced by the desire to signal wealth and attain social status. This insight is not entirely new – even Adam Smith, in the Wealth of Nations, complains that his contemporaries spend too much on “status goods” that are not a necessity of life, and which they most likely can’t afford.

Social signaling motives in consumption seem to be present in many different economic settings, and may in fact be so widespread that they can be linked to larger economic phenomena, such as inequality and persistent poverty. Studies using household surveys show, for example, that the poor around the world spend a strikingly large share of their income on visible expenditures, which may have negative implications for asset accumulation, household indebtedness, and investments in education.The same pattern has been shown to hold for ethnic minorities in the Unites States – so much so, that a recent study argues that differences in conspicuous consumption may account for as much as one third of the wealth gap between Whites and African Americans

So, where does the demand for social status, expressed through consumption choices, come from? In a recent study, we conducted a series of field experiments to explore the psychological factors that explain status signaling behavior in consumption. We worked with a large bank in Indonesia, which markets platinum credit cards – a classical example of a visible status good – and designed a series of experiments in which the bank’s customers were offered the opportunity to upgrade to a more prestigious credit card. Within this setting, we are able to tweak the status aspects of the offers to provide causal evidence on the psychological factors that explain status signaling behavior in consumption.



Figure: We use a series of experiments with premium credit cards –which are vertically differentiated by income requirements and appearance– to understand the psychological factors behind the demand for status goods.

The first experiment we conduct is designed to test, whether people have demand for the pure status component of a good. Showing this empirically is hard, because any status good one can think of provides both consumption and status utility, so that in most real-world settings it is difficult to disentangle which of these features is driving demand for the product. To get around this challenge, we worked with the bank to design a control product that has all the instrumental features of the platinum card – same credit limit, discounts, customer service, and special offers – but does not look like a platinum card, thus stripping away the visible status component of the product. We then implemented the experiment in a series of marketing calls. In these calls, customers assigned to a control group were offered an upgrade to a benefits package that included all instrumental features of the platinum card but not the visible status aspect, while customers in a treatment group were offered an upgrade to an actual platinum card. The only difference between the two offers is the visible status aspect of the card, so that we can isolate how much people are willing to pay for the pure status component of the card.
 
We find that customers are indeed willing to pay non-trivial amounts of money for the pure status signaling aspect of the card. Take-up of the offer is approximately 7 percentage points higher in the platinum treatment group, and a benchmarking exercise suggests that the bank would have to offer a discount of more than 50% of the annual fee to get the same increase in take-up generated by a simple change in color that marks the card as the higher-status platinum tier.
 
In our second experiment, we test one of the main theoretical predictions that economic theory makes about status goods: the observation that demand for a status good should be affected by who else has access to it. To test, whether this mechanism is at play in our setting, we use an information experiment with current platinum card customers. In this experiment, the bank called customers and informed them that it was planning to introduce a new top credit card tier – the “diamond card”! Respondents were offered to be among the first customers to receive the new card once it becomes available for a nominal sign-up fee. While all participants in the experiment received the same product offer, customers assigned to a treatment group were additionally informed that the bank had recently lowered the income threshold for its platinum card, thereby expanding the pool of customers who can access the status good. The theoretical prediction is straightforward: if the cards in our setting are a status good, telling customers that more people can now access the credit card they currently own should make them more eager to upgrade to a more powerful status good that restores the separating equilibrium between the haves and the have-nots! This is exactly what we find: customers who are told that the income criteria for the platinum card have been recently relaxed are nearly twice as likely to sign up for the upgrade to the new diamond card.
 
In our third and final experiment, we take a closer look at the psychological factors behind the demand for status. Why is it that people value social status? On one hand, the reasons could be purely instrumental. That is, people might value social status because they expect to reap material benefits – more powerful friends, better treatment in shops and so on. On the other hand, the reasons could be more psychologically complex. In particular, a literature in social psychology and identity economics argues that the demand for social affirmation might be related to one’s self-image. To examine this hypothesis, we set up an experiment that makes use of an intervention from the psychology literature. The bank again called customers and offered them either an upgrade to a platinum card or a control product. However, prior to receiving this offer, customers in a treatment group, were asked to complete a task that asks them to talk about an accomplishment that made them proud – an intervention that has been shown to temporarily boost self-esteem. The results confirm that the demand for social affirmation is a function of self-image: Participants who received the ego-boost intervention have lower demand for the status good, suggesting that self-image and social image are substitutes and people demand status goods (and the social affirmation that comes with them) to compensate for low self-esteem. This seems to hold not only in the case of credit cards – we additionally able to confirm this general result in an online experiment with a parallel design.
 
What do we learn from these results? First, our experiments provide novel empirical evidence on status goods that confirm some things we’ve always suspected, but weren’t really able to show empirically: people are willing to pay significant amounts of money to gain social status, and the demand for status goods is affected by who else can afford them. Second, and more importantly, we show that higher self-esteem causally reduces demand for status goods. We believe that better understanding the effect of self-esteem on economic choices is an important topic of future research, especially in settings where self-esteem may be especially low, such as in populations facing poverty, low social status, and negative stereotypes.

Comments

Submitted by Rajeev Gopal on

Why is it important to understand the role of self esteem on consumption choices? Is it to help companies and vendors to figure out how to increase their sales or charge a premium pricing for their goods ?

Dear Rajeev,

 

Thank you for your question – you raise a very interesting and important point! It is indeed true that banks have often been accused of strategically exploiting the behavioral biases of their customers. This is an issue that has gotten a lot of attention since the global financial crisis, and has led to much new thinking and increased efforts to improve transparency and financial consumer protection. That’s where our research comes in: we very much believe that to devise smart regulation that effectively protects consumers, we first need to understand the basic economic and non-economic factors that drive consumer behavior. We attempt to do this here for the case of status-seeking behavior, a fairly common phenomenon that affects all sorts of consumption choices, using the specific case of the market for credit cards.

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