Status, Market Power, and Veblen Effects*

We analyze a duopoly model where …rms sell conspicuous goods to horizontallyand vertically-di¤erentiated consumers. These consumers care about both the intrinsic quality of the goods they purchase as well as the social status conveyed by these goods (namely, the social inference of their hidden type based on their purchase). Firms o¤er non-linear price and quality schedules that, in e¤ect, screen consumers using a combination of two commonly observed instruments: skewed markups (or “Veblen e¤ects”) and upward-distortions in quality. We show that the forces of imperfect competition lead …rms to use a sophisticated combination of these two instruments. Our work di¤ers from previous literature in that Veblen e¤ects and quality distortions simultaneously arise, and it also provides a setting in which their interaction can be analyzed. Importantly, the two screening instruments have very di¤erent welfare implications, with markups being welfare enhancing as they create an implicit market for status –mediated by the …rms – that reduces the need for distortions in quality. We also show that once the forces of imperfect competition are considered, optimal corrective taxation di¤ers signi…cantly from standard proposals.