Consumer Consumption - Term Paper Example

Table of Contents Explaining Consumer Consumption 2 Lecturer’s Review of the Dual Effect 11 Analyzing the Reviews 15 Recommendations 16 References 17 Explaining Consumer Consumption The concept of ‘consumer consumption’ or ‘consumer expenditure’ has been introduced by economists from different viewpoints in different ages. For instance, Veblen introduced the theory of ‘conspicuous consumption’ during the late 1890s signifying customers’ intention to buy a commodity as his/her screening of wealth and superiority (Veblen, 1965). Similarly, the evolution of ‘neo-classical’ theory was developed in the 1930s explaining the consumers to be the autonomous bodies who possess a direct impact on the price of commodities served in the market (Bruni & Porta, 2007). It can be stated as a matter of fact that these two theories, relative to the concept of consumer consumption, was introduced at a wide difference of nearly four decades and certainly focuses on distinct assumptions which often tends to contradict each others’ view point. As in the case of Veblen approach, consumers are termed to have no such influence on the price of the commodity; whereas, in the neo-classical theory, customers are considered as one of the major catalysts to influence the commodity price (Himmelweit & et. al., 2001). The concept of consumer consumption is often demonstrated as the pattern of expenditure made by the consumers in exchange of a particular commodity. It is further stated by economists that consumer consumption or the decision taken by the consumers to buy a commodity depends on the price of the product or the services rendered, their requirement or individual preferences, the availability of the product and quality of the commodity served among others. Thus, it may vary according to the changes occurring in relation to any of these variables (Lee & et. al., 2009; Himmelweit & et. al., 2001). However, as mentioned in the theory of ‘consumer sovereignty’ by the neo-classical approach, individual preferences, amid the other factors tend to be one of the strongest influencing factors of consumer consumption. This theory further depicts that these preferences are endogenous in nature and thus tends to be highly influenced by the external factors such as choices favored by the society (King & et. al., 2006; O’Hara & Stagl, 2002). Based on these assumptions, according to the consumer consumption behavior demonstrated by neo-classical theory, the buyers are termed to be one of the major drivers of price change that subsequently leads to change in quantity. The theory further assumes that price and demand for a particular commodity is conversely related which depicts the equilibrium to be as follows (Heskett, 2009). Figure 1: Neo-Classical Approach of Consumer Consumption: Supply and Demand Source: (Heskett, 2009) To elaborate on the neo-classical theory, the illustration of tea brands can be taken into account. For instance, when the price of one tea brand rises from P1 to P2, the customers are quite likely to consume its substitutes, i.e. either switch brand or switch the product from tea to coffee and thus lead to a shift in the quantity demand from Q1 to Q2. Thus, it will lead to the shift of supply curve from S1 to S2. On the contrary, the Veblen’s approach of the 1890s depicted a contradictory view on the concept of consumer consumption as depicted in the neo-classical theory of ‘consumer sovereignty’. Where on one hand, consumer preferences are termed to be endogenous in nature by the neo-classical economists; on the other hand, Veblen signifies consumer consumption as an exogenous aspect being determined by the intrinsic desires of the customers rather than being influenced by any external social factors (Bowles & Park, 2004). This assumption was further termed as ‘conspicuous consumption’ by Veblen’s approach, where consumers’ expenditure was only to reflect their elitism in the society (Charoenrook & Thakor, 1997). Another major difference between these two theories is that Veblen’s approach does not directly inhibit on the demand curve of the consumers as in the case of neo-classical approach. Neither does it believe in the influence of consumers on the price charged for the commodity. Particularly concentrating on the sociological factors and psychological aspects, the Veblen’s theory of conspicuous consumption emerged to be quite complex to be directly related to the demand function. However, considering that consumer consumption, as stated in the Veblen’s theory, depends on sociological factors and is intended towards the elitism of the consumer, the decision is also likely to depend on the price paid for the commodity (Veblen, 1965). Relating the Veblen’s effect to the consumption of luxury goods, the price change can be observed as directly proportional to the quantity demanded. This depicts that consumers tend to consume a larger amount when priced high and vice-versa as their intention is to show their superiority in the community. Nevertheless, this assumption holds true until the real price contradicts or exceeds the conspicuous price (i.e. the price assumed by the society) creating a constraint of affordability (Shukla, 2011; Leibenstein, 1948). Thus, the demand curve would be as shown in the diagram below: Figure 2: Veblen’s Approach of Consumer Consumption: Supply and Demand Source: (Leibenstein, 1948) Such as, in the case of branded designer wears, a customer group belonging to the elite class shall be strictly loyal to a particular brand so as to satisfy their social pressure and maintain their status in the society as per Veblen’s Theory. Therefore, a price rise of the product from Px to Py is not quite likely to have an adverse effect on the quantity and lead to an increase in the quantity demand from Qx to Qy. From the above mentioned contradictory views of Veblen, in relation to the views presented in the neo-classical theory regarding consumer consumption, it can be well observed that concurrent implementation of these two models shall give rise to complexities in determining the accurate progress or functioning of consumer behavior. Where on one hand, the neo-classical theory change in demand tends to shift the supply curve in order to attain the equilibrium point; on the other hand, Veblen’s approach intends to shift the demand curve for the attainment of the equilibrium point. The fact can be apparently observed from accumulating these two theories diagrammatically as below: Figure 3: Veblen’s Approach and Neo-Classical Theory on Consumer Consumption As can be witnessed from the above diagram, in Veblen’s approach, a shift of commodity price from P1 to P2 is quite likely to shift the demand curve from D1 to D2 on the same supply curve S2. On the contrary, a shift of price on the same margin, i.e. from P1 to P2, shall shift the supply curve from S1 to S2 on the same demand curve D2. Therefore, the implementation of these two theories on consumer consumption will indicate two different equilibria points E2 and E3. Hence, it is likely to create complexities in deriving accurate demand functions caused due to the dual effect of these contradicting theories. This theory can be apparently observed taking the example of luxury car (i.e. the product) that can be termed as a luxury product for lower income group people, but for the elite class of the society, it can be termed as a requirement to satisfy the social pressure. Hence, in case, the price of the luxury car rises from P1 to P2, the lower income group consumers are likely to reduce their demand from Q1 to Q2 and thus lead to a shift in the demand curve as per the neo-classical theory. However, the elite class of customers is still likely to purchase greater quantity of the luxury car which will shift the quantity demanded from Q1 to Q3 so as to satisfy their need as per the Veblen’s effect. Therefore, the producers shall have to follow two equilibria for the either group of customers which shall again raise the complexity of business operations. Lecturer’s Review of the Dual Effect The implications of the Veblen theory was often supported as well as opposed by multiple economists in the contemporary era. Innumerable literatures have been publishing since the contradictory views of these two theories started creating a change in the perception of the economists towards the demand side of consumer consumption. In most of the literatures, the economists have viewed Veblen’s opinion on the neo-classical approach towards consumer sovereignty which was apparently incongruous to the assumptions of the modern micro-economic approach. However, in a few of them, the economists have intended to concentrate on the depiction of the situation where both these theories are simultaneously implemented on the concept of consumer consumption. For the purpose of this study, three literatures are considered where the authors provide with their views on the situation when both Veblen and neo-classical theory is implemented on judging the consumption pattern. According to Lehdonvirta (2005), if the Veblen’s theory is applied in the neo-classical approach towards consumer consumption, it is quite likely to cause ‘mudflation’ which depicts a situation where the real wages tend to increase showing a stable growth of the economy and on the contrary, the currency value is observed to be decreasing. However, this kind of situation is stated to exit only in virtual economy and not in the real economy. As noted by the author, with the Veblen’s effect on the demand side, the players or consumers were able to consume a greater quantity at a comparatively lesser price. It was particularly because according to the Veblen’s theory, consumer consumption is majorly derived by the social pressure faced by them and their desire to be included in the higher income group which motivates them to favor new products over the old ones. Because new commodities are frequently introduced in the market before the prior one is completely destroyed, it tends to minimize the price of the formerly introduced product and assist the consumers to buy those. This situation is likely to result in an increasing possibility for the players to consume more, enhancing their social status. On the contrary, it is quite likely to hamper the currency price causing ‘mudflation’. In the words of Lehdonvirta (2005), “...however, due to the Veblen effect, the rise in real wages actually destroyed value rather than created it”. Furthermore, as stated by Winkelmann (2011), the two theories of consumption externalities and conspicuous consumption can be used alternatively in relation to the neo-classical approach to consumer consumption. Taking the example of luxury cars, the author depicts that conspicuous consumption shall lead to lower satisfaction level in terms of income along with greater possibility of conspicuous consumption in the given economic region (Winkelmann, 2011). It was further noted by Reisch (2008) that if the theory of ‘conspicuous consumption’ is simultaneously implemented with the theory of ‘consumer sovereignty’ can reward with various opportunities towards the obtainment of a broader outlook to the concept of consumer consumption apart from the above mentioned limitations of complexity and factual errors. According to his viewpoint, the implementation of Veblen’s theory shall give rise to the consumer competence rewarding them respect in the social stature, their expertise to an extent which shall in turn enhance customer responsiveness towards a particular commodity (Reisch, 2008). From a broader point of view, Frijters & Leigh (2008) described that the impact of Veblen’s conspicuous consumption theory is likely to have a strong impact on the labor supply leading to distinct consumption pattern in the economy under the neo-classical effect of customer sovereignty. According to the study conducted by Frijters & Leigh (2008), where consumers are sovereign they have the full liberty to decide whether to devote their time in working and earning the livelihood towards easily evident consumption levels within the economy or to enjoy the conspicuous leisure. In case, the consumers of an economy decide to spend their time inclined to conspicuous leisure, the employee turnover rates within that economy is likely to increase causing the migration of workers to increase assuming that the neighboring economies will have consumers inclined towards the usage of time in earning. Therefore, the dual effect of Veblen’s theory and neo-classical theory shall lower the costs of mobility existing between two or more economic markets creating a negative impact on the overall economic development. It is due to this reason that luxury goods are charged with higher taxes so as to discourage conspicuous leisure which has a negative impact over the implementation of customer sovereignty (Frijters & Leigh, 2008). Analyzing the Reviews The reviews generated from the above discussion explicitly narrates that the implementation of both these theories is likely to have a mixed impact on the depiction of consumer consumption viewing the consumer as sovereign and the consumption as conspicuous. Where on one hand it is likely to empower the consumers’ buying decisions, on the other hand it will also consider the concept of ‘wasteful consumption’ providing a broader perspective towards the demand side of consumption. However, the implementation of these two theories simultaneously, shall also result in the increased potentiality of monopolistic market where only a particular group is likely to attain the majority of advantage offered in the market due to lowering price of assets resulting to ‘mudflation’ (Lehdonvirta, 2005). As was apparently observed from Figure 3, that applying the assumptions of these theories on the demand side of the consumer consumption shall possibly result in more than one equilibria, the risk of ‘mudflation’ and complexities in deterring the exact quantity to be served as well as bought can be evidently justified. In this scenario, the price of the formerly introduced commodity will fall raising its demand according to the neo-classical explanation. Similarly, with the introduction of a new commodity in the same product line will attain higher demand from the higher-income class increasing the demand for the newer goods. Hence, two equilibriums will be obtained for a particular commodity market indicating the concurrent application of these theories. Hence, it is quite apparent that the implementation of these theories will have mixed influence over the concept of consumer consumption. Recommendations It is of no doubt that the theory explained by Veblen, defining the concept of consumer consumption as ‘conspicuous consumption’ contradicts the neo-classical theory of ‘consumer sovereignty’ on various aspects. For instance, the consideration of ‘wasteful consumption, the evolutionary tenet of being Darwinian or Pre-Darwinian as influenced by Lamarckian, along with the mechanism explained in relation to the demand side of consumer consumption can be termed as a few noteworthy paradoxical facts related to the assumptions of these theories. However, in many instances, it has been observed that the implementation of these theories simultaneously shall unveil new dimensions to post-modern microeconomics. With this concern, it is suggestible that the limitations and advantages should be accurately identified concerning these two theories rather the contradictory views expanding the distance within those. The basic tenets of these approaches that intend to eradicate one others’ limitations should be considered while deriving a new approach towards a more in-depth and broader understanding of consumer consumption. References Bowles, S. & Park, Y., 2004. Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right? Economics Department Working Paper Series. Bruni, L. & Porta, P. L., 2007. Handbook on the Economics of Happiness. Edward Elgar Publishing. Charoenrook, A. & Thakor, A., 1997. A Theory of Conspicuous Consumption. Vanderbilt University. Frijters, P. & Leigh, A., 2008. Materialism on the March: From Conspicuous Leisure to Conspicuous Consumption? The Journal of Socio-Economics, Vol: 37, pp. 1937–1945. Heskett, J., 2009. Creating Economic Value by Design. International Journal of Design, Vol: 3, pp. 71-84. Himmelweit, S. & et. al., 2001. Microeconomics: Neoclassical and Institutionalist Perspectives on Economic Behavior. Cengage Learning EMEA. King, M. J. & et. al., 2006. Customer Sovereignty: Why Customer Choice Trumps Administrative Capacity Mechanisms. The Electricity Journal, pp. 38-52. Lee, R. & et. al., 2009. The Interactions of Consumption Characteristics on Social Norms. Journal of Consumer Marketing, Vol: 26, pp. 277– 285. Lehdonvirta, V., 2005. Virtual Economics: Applying Economics to the Study of Game Worlds. Helsinki Institute for Information Technology. Leibenstein, H., 1948. Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand. Quarterly Journal of Economics, pp. 183-207. O’Hara, S. U. & Stagl, S., 2002. Endogenous Preferences and Sustainable Development. Journal of Socio-Economics, Vol: 31, pp. 511–527. Reisch, L., 2008. The Nature and Culture of Consumption in Consumption Societies. Council of Europe Publishing, pp. 15-20. Shukla, P., 2011. Impact of Interpersonal Influences, Brand Origin and Brand Image on Luxury Purchase Intentions: Measuring Interfunctional Interactions and a Cross-National Comparison. Journal of World Business, Vol: 46, pp. 242–252. Veblen, T. B., 1965. The Theory of the Leisure Class. Forgotten Books. Winkelmann, R., 2011. Conspicuous Consumption and Satisfaction. Journal of Economic Psychology, Vol: 33, pp. 183–191. Read More