TOWARD AN ECONOMIC THEORY OF FASHION

Strong as is the desire for variety, it is weak compared with the desire for distinction: a feeling which if we consider its universality, and its constancy, that it affects all men at all times, that it comes with us from the cradle and never leaves us until we go to the grave, may be pronounced to be the most powerful of human passions. Nassau Senior(1) With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. Adam Smith(2) I. INTRODUCTION Positively sloped "demand" curves are used in marketing textbooks to explain the pricing of fashion merchandise. (3) "Snob" or "prestige" effects are alluded to in support of the claim that price increases can lead to an increase in the quantity demanded. In the tenth edition of their text, E. Jerome McCarthy and William D. Perreault [1990] offer a demand curve with a positively sloped segment. They explain: Prestige pricing is setting a rather high price to suggest high quality or high status. Some target customers want the "best," so they will buy at a high price. But if the price seems "cheap," they worry about quality and don't buy. (P. 506; footnote omitted, emphasis in the original.) In another text, Ralph M. Gaedeke and Dennis Tootelian [1983] also discuss a positively sloped demand curve: Some products do not have the traditional downward sloping demand curve previously described, but a more curved slope, illustrated in Exhibit 13-6 [demand curve with upward sloping portion--not shown]. This reflects the real impact of price as a part of the product's value. Quite obviously, as a product's price rises above [P.sub. 0], demand will begin to drop as some consumers will simply be unable to afford the product. However, that decline is rather slow until very high prices are reached. But demand also begins to drop at prices below [P.sub. 0], showing that part of the reason for owning the product lies in its high price--it has prestige value. Economists react by asserting that marketing explanations are ad hoc, devoid of economic content. Conversely, marketers say that economic models are naive and incapable of explaining the marketing of fashion goods. As economists, we have a bias towards economic explanations, but these explanations are incomplete and not highly valued by the market. In stark contrast, the advice of professional marketers (that economists contend is muddled or worse) is amply rewarded in consulting work. Is there a market failure in the consulting market, or does marketing provide an insight that economics lacks? We start with the premise that the intuition behind marketing explanations, that people desire prestige, has validity. This notion can be incorporated into economic theory using Kelvin Lancaster's [1971] notion that when a purchase is made, what is bought is a bundle of services or characteristics. The salient feature of a fashion good is its ability to confer prestige or status. (4) The argument is straightforward: There is a sociobiological basis for status-seeking behavior. Status-seeking is an evolved trait that is innate to humans as well as to many other animals. Given the pervasiveness of status-seeking, human cultures have developed effective signals of status--fashion being just one. We incorporate the status yielding nature of fashion goods into a standard demand model by assuming that the value consumers attach to a fashion good depends on the stock held by other consumers. This interdependency among consumers allows us to explain the upward sloping constructs (labeled demand curves) that populate marketing texts. Our model has downward sloping demand curves throughout, but (because of the interdependencies) generates cyclical price behavior that can be misconstrued as aberrant (positively sloped) demand functions. …