Marketing Seminar（2016-06）

Title: Modeling the Price Signaling Effect and Substitution Effect in Consumer Demand for Luxury Goods

Speaker:Sha Yang, Marshall School of Business in the University of Southern California

Time:Monday 6, June 13:30-15:00

Place:Room217, Guanghua Building 2

Abstract:

Price signaling is a key aspect that differentiates luxury goods from necessity goods. An expensive purchase of a luxury product helps individual consumers signal their social status, going beyond the quality premium inferred from a higher price. On the other hand, price is almost always a monetary cost to consumers which could restrain demand and lead to the standard substitution effect of price. Our paper sets out to fill a gap in the marketing literature by proposing a modeling framework to capture thesignaling effect(for both status and quality) and thesubstitution effectof price in driving consumer demand for luxury products. The proposed model is built upon the utility-maximization framework with two novel extensions. First of all, unlike the classic demand model where price is assumed to only affect consumer budget, we make an extension by allowing price to also affect the marginal utility of a product to capture the signaling effect. This extension is supported by the economic theory, suggesting that price can be an important attribute an individual would “consume” and derive benefit or utility from the consumption experience. Second of all, since each luxury brand has many different versions associated with different price points, and some price versions may not be observed from data, we jointly model which brand and at what price version are chosen by an individual consumer. In particular, we first model the optimal price version for each brand for a consumer, and then model the brand choice given the optimal price versions. We apply our model to a unique survey-based dataset on Chinese consumer purchase of luxury watches, collected by a large international research company. Several interesting findings emerge from our analysis. Firstly, we detect strong signaling effect and substitution effect of price on consumer demand for luxury watches. Secondly, we find that price mainly signals status rather than quality after controlling for the effect of quality on the baseline utility. Thirdly, we find that family income has a U-shape relationship with the positive signaling effect, suggesting that low-income or high-income consumers are more likely to use price to signal their status than their counterpart of the middle-income group. Finally, our what-if simulations show that, introducing cheaper versions can help higher-priced luxury brands improve choice share and revenue, but do not affect lower-priced luxury brands significantly. Moreover, an increase in income benefits higher-priced luxury brands but has a complex effect on lower-priced ones.

Introduction:

Sha Yang is a Professor of Marketing at the Marshall School of Business in the University of Southern California. She received her Bachelor degree in International Economics from Renmin University of China, Master degrees in Economics, Statistics, and Marketing, and Phd in Marketing from the Ohio State University. Her research focuses on modeling and understanding consumer choices and responses to marketing, implemented through the use of sophisticated econometric/statistical methods (e.g. Bayesian inference), and massive consumer-level and firm-level data. Her recent research interests include Internet advertising and other online marketing applications. She is an associate editor at Quantitative Marketing and Economics, and serves on the editorial board of Journal of Marketing Research, Marketing Letters, and Marketing Science. Professor Yang received honors such as “MSI Young Scholar” and grants from various institutions. Professor Yang has collaborated with companies such as Visa, Miller Brewing Company, PepsiCo, CBS, Nielsen Media Research, and Taobao.com.

//www.marshall.usc.edu/faculty/directory/shayang

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