Consumers Keep Up (Or Down) with the Joneses During Recession
Consumers who are relatively unaffected by economic downturns spend less on luxury items during a recession because social standards shift along with the cycles of the economy. In addition, the role of social status in household spending decisions is strongest for non-essential goods that are more visible.
These are among the findings of researchers from the University of Houston C. T. Bauer College of Business and Duke University’s Fuqua School of Business, whose study, “How Economic Contractions and Expansions Affect Expenditure Patterns,” will be published later this year in the Journal of Consumer Research. To see an advance copy of the research report, click here.
The researchers examined U.S. Bureau of Labor statistics data on spending by more than 66,000 American households from 1982 to 2003, a period spanning three recessions: July 1981 – November 1982, July 1990 – March 1991 and March – November 2001.
The authors suggest consumers derive utility not only from direct consumption of a good, but from how much others are spending on the same good.
“Our research indicates consumers draw more value from consuming the same quantity of a certain non-essential good if they see others consuming less of it,” said Rex Yuxing Du, marketing professor at UH Bauer College. “This phenomenon can have significant implications for marketers of luxury goods during recession, when people generally have less to spend and feel less compelled to visibly demonstrate their wealth by purchasing luxury items.”
The study also found non-essential goods and services have a ‘positional value’ that signals social status. The findings challenge the traditional assumption that consumers change their spending habits during economic slowdowns simply because of budgetary constraints.
“Non-essential goods like jewelry, clothing and travel maintain their attractiveness regardless of the state of the economy,” said Wagner Kamakura, marketing professor at Duke’s Fuqua School of Business and lead author of the study. “But the positional value of non-essentials is reduced during recession. When households affected by recession spend less on positional goods, households not directly affected by recession — even though their overall consumption budgets may remain constant — can follow suit and still maintain their social status. Those households whose budgets are not significantly impacted by recession may choose to divert more money into savings.