Strategic pricing: An analysis of social influences*
© Vithala R. Rao 2009. All rights reserved. Social factors influence our everyday life in many ways. For example, consumers purchase conspicuous goods to satisfy not only material needs but also social needs such as prestige. In an attempt to meet these social needs, producers of conspicuous goods such as cars, perfumes and watches highlight the exclusivity of their products. In this chapter, we discuss a model of conspicuous consumption and examine how purchase decisions are affected by the desire for exclusivity and conformity. We show that snobs can have an upward-sloping demand curve but only in the presence of consumers who are (weakly) conformists. The influence of these social needs on firms' profits is moderated by the structure of market. In a monopoly, conformism is conducive to profits while snobbishness hurts profits. We find that the results are reversed in a duopoly. We also investigate how social needs may influence the prices and qualities of the products that consumers choose to buy. A series of laboratory tests lends support for our some of model predictions.
Start / End Page