Pricng and Quality Desicion With Conpicious Consumer

Transportation Research Part E 165 (2022) 102857
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Transportation Research Part E

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Pricing and quality decisions with conspicuous consumers

Guowei Zhu a , Jianxiong Zhang b , Enfeng Xing b ,∗, Danke Han b
a
Business School, Hunan University, Changsha, Hunan 410082, China
b
College of Management and Economics, Tianjin University, Tianjin 300072, China
ARTICLE INFO ABSTRACT
Keywords: With the growing demand of individuality, conspicuous consumption has gradually become
Conspicuous consumption a common phenomenon. This study focuses on how conspicuous consumption affects firm’s
Pricing pricing, quality decisions and profit. By developing a game-theoretic model consisting of one
Quality decision
monopolist who sells a conspicuously consumed status product and two segments of consumers,
Game theory
i.e., conspicuous consumers and non-conspicuous consumers (the former are less sensitive to
price than the latter), we come to the following results. Firstly, the presence of conspicuous
consumers benefits the firm by leading to higher quality and price when their price sensitivity
is relatively low, while can hurt the firm by leading to lower quality and price regardless
of the proportion of conspicuous consumers and the conspicuousness degree when their price
sensitivity is quite high. Secondly, for a moderate price sensitivity, we find an interesting result
that the proportion of conspicuous consumers shows a non-monotonic effect on the firm’s profit.
Specifically, the firm’s profit increases (decreases) with the proportion of conspicuous consumers
when the quality investment efficiency is high (low) and the conspicuousness degree is low
(high), while the profit decreases first and then increases for those medium quality investment
efficiency and conspicuousness degree. Furthermore, we find that the joint decisions on quality
and price exhibit strategic complementarity. Finally, the robustness of the results obtained is
verified in numerous model extensions.
1. Introduction
With the rapid development of economy and the enrichment of material life, conspicuous consumption has become a common
social phenomenon. In 2019, global spending on luxury products was more than €1.3 trillion (Bain, 2020), which shows that
the conspicuous-good industry is becoming an increasingly growing economic sector. The concept of ‘‘conspicuous consumption’’
was originally proposed in 1899, which is stated by Thorstein Veblen in his book of The Theory of the Leisure Class that
conspicuous consumption is the consumption directed at bystanders to show their economic status and is ‘‘the evidence of wealth’’
(Veblen, 1899; Bagwell and Bernheim, 1996). Products such as cars, fashion products, and luxury personal items grant status value
to consumers, as the conspicuous consumption of these products signals their wealth and status (Li, 2019).
In order to satisfy consumers’ conspicuous psychology, firms often use a series of strategies to highlight the uniqueness of their
products (Wan et al., 2013), such as providing high-end product customization services and issuing limited products (Balachander
and Stock, 2009; Amaldoss and Jain, 2010). For example, Chanel and Louis Vuitton both provide customers with customized patterns
and leather personalized services. Lamborghini has set a production limit of 8000 units to keep the brand unique in 2020. Another
famous example is the Hermes’ six-figure Birkin bag, which costs from $10,900 to $150,000, and it often takes four to six years for
∗ Corresponding author.
E-mail addresses: guoweiz@hnu.edu.cn (G. Zhu), jxzhang@tju.edu.cn (J. Zhang), efxing@tju.edu.cn (E. Xing), 136213680@qq.com (D. Han).
https://doi.org/10.1016/j.tre.2022.102857
Received 12 January 2022; Received in revised form 28 June 2022; Accepted 3 August 2022
Available online 19 August 2022
1366-5545/© 2022 Elsevier Ltd. All rights reserved.
G. Zhu et al. Transportation Research Part E 165 (2022) 102857
customers to get their customed bag. All of these strategies reflect the efforts of luxury brands to enhance the scarcity and uniqueness
of their products.
However, another interesting phenomenon is that, some well-known brands just as Dior, Chanel and Gucci have opened flagship
stores in China for cosmetics such as perfume and lipstick, Hermes also has opened an official flagship store for Hermes perfume in
early 2020 at T-mall. Consumers only need to spend less than $100 to get a luxury brand perfume. These behaviors of luxury brands
seem to hurt the scarcity and uniqueness of the products, and promote the brand to popularization by providing low-end products.
Therefore, facing the consumers with conspicuous psychology, we wonder whether the luxury brands should offer relatively low-
price and low-quality products to gradually popularize themselves, or focus on high-end products with high quality to keep the
brand unique.
Moreover, conspicuous consumers usually have lower price sensitivity than ordinary consumers, because, in general, they own
more wealth and are more willing to buy high-priced products to pursue exclusivity and show social status (Vickers, 2003).
Inevitably, the conspicuous consumers bring decision-making difficulty associated with pricing and quality strategies to the firm.
Specifically, on the one hand, because conspicuous consumers pursue exclusivity and pay attention to the uniqueness of products,
the presence of conspicuous consumers reduces the total demand and profitability, thus the firm has incentives to decrease price
for maintaining a suitable demand. On the other hand, conspicuous consumer’s lower price sensitivity can allow the firm to set a
higher price which increases the firm’s marginal revenue and profitability. Therefore, how do these two opposite effects affect the
firm’s pricing and profit is worth studying. Furthermore, because conspicuous consumers may have a higher willingness to pay for
quality, firms would prefer to cater to them by offering a high-quality product (Amaldoss and Jain, 2015). As one of the important
methods for firms to affect demand, a high product quality can increase the attractiveness and value of products, so as to improve
the profitability of firms. Meanwhile, the return from quality investment depends both on the demand and on the marginal revenue
associated with pricing. On the one hand, conspicuous consumption reduces demand, thus undermines the marginal return on
quality investment. On the other hand, conspicuous consumers endowed with low price sensitivity can increase the marginal return
of quality investment by increasing the product price. Therefore, the presence of conspicuous consumers also has an important
impact on firm’s quality decisions. The joint decision for quality and pricing which act as two important measures to maximize
profit (Nagurney et al., 2015; Rezapour et al., 2015), is especially important for the profitability of the firm operating the product
to serve the consumers with conspicuous psychology. Facing with conspicuous consumers, the firm has to maintain a subtle trade-off
between the demand and the profit margin when making the joint decisions of quality and pricing, which is the key concern of the
paper.
Based on the above background, we focus on how the firm can make effective use of consumers’ conspicuous behavior to develop
effective operational and marketing plans and better position the product. More specifically, we pay attention to the following
questions: (1) How does the presence of conspicuous consumers influence the firm to develop product pricing and quality strategies?
(2) What impact will the presence of conspicuous consumers have on the firm’s profit?
To address the research questions above, we develop a game-theoretic model consisting of one monopolist who sells a conspic-
uously consumed status product and two segments of consumers, that is, consumers with and without conspicuous psychology.
We investigate the impacts of conspicuous consumption behavior on product pricing, quality decisions and the firm’s profitability.
Additionally, we discuss four model extensions, including extending our framework to the supply chain environment composed of
one manufacturer and one retailer, considering heterogeneous quality sensitivity, a positive marginal production cost and product
line decision, to verify the robustness of the results obtained in the basic model.
The main findings of this paper are as follows. First, when the price sensitivity of conspicuous consumers is relatively low, product
price and quality increase with the proportion of conspicuous consumers. The conspicuous consumers exert a positive effect on profit
for most cases. Second, when conspicuous consumers’ price sensitivity is quite high (e.g., approaching to that of non-conspicuous
consumers), the presence of conspicuous consumers always hurts the firm by leading to lower quality and price regardless of the
proportion of conspicuous consumers and the conspicuousness degree. Third, when the price sensitivity of conspicuous consumers is
at a medium level, we find an interesting result that the quality investment efficiency and the conspicuousness degree play important
and subtle roles in affecting the firm’s profit, product quality and price. Specifically, when the quality investment efficiency is high
(low) and the conspicuousness degree is low (high), the profit increases (decreases) with the proportion of conspicuous consumers.
But for those medium quality investment efficiency and conspicuousness degree, the profit tends to decrease first and then increase
with the proportion of conspicuous consumers. And the conspicuous consumers’ impact on the product quality and price also shows
a non-monotonic trend. Furthermore, we find that the joint decisions on quality and price show strategic complementarity. Finally,
the robustness of the results obtained is verified in numerous model extensions.
The reminder of the paper is organized as follows: Section 2 reviews the related literature. In Section 3, we present the basic
model and notations. Section 4 presents the equilibrium solutions and analytical results. Numerical analysis is given in Section 5
to illustrate some theoretical results and obtain more managerial insights. Model extensions are provided in Section 6. Finally, we
give the conclusions in Section 7.
2. Literature review
Our study relates to three research streams, namely, the conspicuous consumption, pricing, and quality decision. Conspicuous
consumption refers to the desire of consumers to show their wealth in public, enhance their image, and improve their social
status through consumption behavior (O’Cass and McEwen, 2004). Moreover, individuals may have specific motivations: to portray
the desired image, to communicate that they belong to a particular social class, or to show that they can afford a high-priced
2
luxury (Nwankwo et al., 2014), all of which denote individuals’ motivations to consume conspicuously. The relationship between
consumer behavior and conspicuous psychology of possessing cars, luxury products, and premium brand products has been deeply
studied from different perspectives (Amatulli et al., 2008; Kastanakis and Balabanis, 2014). For example, Rucker and Galinsky
(2009) find that the powerless may prefer visible or conspicuous consumption that signals status to others. Tereyağoğlu and
Veeraraghavan (2012) analyze a monopolist firm’s pricing and production decisions while selling a good to a market with uncertain
demand from conspicuous consumers. Amatulli et al. (2015) draw the conclusion that one important motivation of purchasing and
consuming products, especially nonessential produces, is to gain status or prestige. Jaikumar et al. (2018) also find that conspicuous
consumption may play the role of elevating one’s own perception of economic well-being. Huang and Wang (2018) investigate
the relationship between social identity and conspicuous consumption. Furthermore, some researches focus on the influences of
conspicuous consumption, such as how conspicuous consumption affects high-carbon consumption behavior (Mi et al., 2018) and
advertising budget allocation (Chiu et al., 2018). Amaldoss and Jain (2015) explore the influence of social effects and market
structure on the branding of conspicuous goods. Sebald and Vikander (2019) explore how consumers’ belief-dependent social image
concerns can affect firm’s strategic choices in a product market setting. Besides, recent literature pay more attention to the effect
of consumer preference, such as exclusivity (Amaldoss and Jain, 2005; Sajeesh et al., 2020), conformity (Zhang et al., 2020a) and
functionality (Sajeesh et al., 2020) on firm’s profit in conspicuous goods markets. Wei and Li (2020) focus on how conspicuous
behavior and concerns of stock availability influence a luxury firm’s operational decisions. Choi and Liu (2019) explore the optimal
advertisement budget allocation strategy and coordination challenge when there are multiple brand-tier products in luxury fashion
supply chains. Arifoğlu et al. (2020) investigate a luxury retailer’s equilibrium markdown and rationing strategies. Shen et al. (2020)
explore new practices and applications in logistics and supply chain management for luxury goods. Our paper also falls into the
topic of conspicuous consumers, but focuses on the impacts of conspicuous consumption on the firm’s operational and marketing
strategies. In addition to the perceived exclusivity mentioned in the above literature, our paper also considers that conspicuous
consumers may have lower price sensitivity than ordinary consumers, to explore how price sensitivity affects firm’s decisions.
Pricing decision, as the concentrated reflection of various competitive strategies of firms, has been studied continually from
various angles such as uniform pricing (Xue et al., 2016; Maiti and Giri, 2017), price promise (Shum et al., 2017; Chen and
Jiang, 2021), dynamic pricing (Yu et al., 2016; Shin et al., 2022) and price discrimination (Jing, 2017; Li et al., 2020a; Cohen
et al., 2022). Furthermore, many researchers began to focus on pricing decision considering consumers behavior, such as strategic
consumers (Cachon and Feldman, 2015; Aviv et al., 2019), consumer loss aversion (Xu and Duan, 2020). Some researchers also
have studied the pricing decision of firms in combination with conspicuous consumption behavior. For instance, Zhou et al. (2015)
study the pricing issue for new product launch in luxury fashion. Shen et al. (2017) examine the effects of demand changes on prices
and differentiated online services of a luxury fashion supply chain with social influences. Sun et al. (2020) investigate single and
dynamic pricing policies of two competing firms over two periods in the presence of social influence. Li et al. (2019a) investigate
the return strategy and pricing in a dual-channel supply chain. Li et al. (2019b) investigate the influence of the showrooming effect
on firms’ pricing and service effort in a dual-channel supply chain. Zhang et al. (2020b) investigate the strategic pricing under
quality signaling and imitation behaviors. Shen et al. (2020) explore new practices and applications in logistics and supply chain
management for luxury goods. The key point for the firm’s pricing is how to balance the demand and profit margin when facing
the conspicuous consumers endowed with low price sensitivity, which is one of our focuses in the paper.
Quality is also an important factor in determining customers’ willingness-to-pay and firm profits (Zhu et al., 2020). Recently,
there are increasing numbers researches about quality decision in operations management. Yoo and Cheong (2018) investigate
several incentive mechanisms for collaborative product quality improvement in a buyer-driven supply chain. Nagurney et al.
(2019) investigate the effect of differentiated products on product quality and consumers welfare. Zhang et al. (2019) study the
interrelationship between a platform’s contract choice and a manufacturer’s product quality decision. Choi and Luo (2019) explore
how data quality problems affect sustainable fashion supply chain operations. Ma et al. (2020) explore how the return window
relates to both the distribution channel and product quality. Zhang and Li (2021) investigate the implications of consumer loss
aversion on firm profit, consumer surplus, and social welfare when firms endogenously make quality disclosure decisions. Li (2019)
investigates how firms selling status goods make vertical line extension decisions when they take consumers’ status preferences into
account. As far as we know, there is little research in quality investment decision for the firm when facing conspicuous consumption,
in which the quality investment return heavily depends on characteristics of conspicuous consumers.
Due to rising customer requirements, product complexity, and global competition, the joint decisions on price and quality have
a significant impact on the long-term economic success of each firm, which has been a hot topic in recent years. Nagurney et al.
(2015) investigate the supply chain network competition in price and quality with multiple manufacturers and freight service
providers. Qi et al. (2016) examine a firm’s quality and price decisions when consumers differ not only in their willingness-to-pay
for quality but also in their reservation utility for the basic product. Jing (2017) examines how behavior-based price discrimination
affects the firms’ endogenous quality differentiation and profits. Zhao and Zhang (2018) investigate dynamic quality and pricing
decisions for customer-intensive service systems with online reviews. Yu et al. (2021) study a firm’s optimal joint product quality
and quantity decisions when the consumers’ utilities change with the market environment. Li et al. (2020b) examine the influence
of the interaction between product quality and product price on product line design. Geng et al. (2022) study the impacts of social
interactions on competing firms’ quality differentiation, pricing decisions, and profit performance. Rao and Schaefer (2013) explore
the effect of exclusivity related to WTP (or say, wealth) on pricing and product management decisions, and show that high intrinsic
quality indirectly generates exclusivity via pricing effects. Our paper differs from the above study by considering quality decision
and focusing on the effect of exclusivity of conspicuous consumption on the consumers’ utility. Although economics literature has
examined conspicuous consumption in market equilibrium, the joint pricing and quality decisions of a firm facing conspicuous
3
Table 1
Decision variables and parameters.
Symbol Description
𝜋 Firm’s profit
𝑝 Product’s retail price (decision variable)
𝑞 Product’s quality (decision variable)
𝐷1 Demand from conspicuous consumers
𝐷2 Demand from non-conspicuous consumers
𝛼 The proportion of conspicuous consumers
𝜃 Willingness to pay for a unit quality
𝛽 Conspicuousness degree of conspicuous consumers
𝛾 Price sensitivity of conspicuous consumers
𝑘 Quality investment cost coefficient
consumers have been relatively unexplored. Therefore, different from most of above researches which only focus on the pricing
decisions, our work focuses not only on firm’s pricing decision, but also on quality decision with considering conspicuous consumers.
To sum up, our paper considers that there are two types of consumers coexisting in the market, i.e., consumers with and without
conspicuous psychology. Among them, we portray the characteristic that conspicuous consumers have lower price sensitivity, which
is in line with reality. More importantly, the joint decisions on pricing and quality in the presence of conspicuous consumers is the
main contribution that distinguishes this paper from the existing literature, and we find that the joint decisions on pricing and
quality exhibit strategic complementarity.
3. Basic model
Consider a monopolist firm in the market that produces and sells a conspicuously consumed status product. The product quality is
denoted as 𝑞, which incurs an investment cost of 𝑘𝑞 2 ∕2 with a positive parameter 𝑘 capturing the quality investment efficiency. The
quadratic form of cost function captures the diminishing marginal returns of quality investment, and is widely applied in existing
literature (Zhang et al., 2019; Li and Qi, 2021). It is assumed that the marginal production cost is normalized to zero (we relax this
assumption in Section 6.3). The firm makes pricing and quality decisions to drive market demand for profit.
Consider a market comprising two segments of consumers: consumers with and without conspicuous psychology, respectively.
We normalize the size of the market to 1, assume that the proportion of conspicuous consumers in the total consumers is 𝛼, and
that of non-conspicuous consumers is 1 − 𝛼. Therefore, the absolute value of buyers’ number 𝐷1 and 𝐷2 also can be viewed as the
relative ratio of buyers. Each customer has a quality valuation 𝜃 and derives a product valuation 𝜃𝑞 for a product with quality 𝑞. That
is, 𝜃 represents the consumers’ willingness to pay for a unit product quality 𝑞, which uniformly distributes on [0,1], reflecting the
heterogeneity of consumers (Ronnen, 1991; Lehmann-Grube, 1997; Zhou et al., 2002). It is assumed that the two types of consumers
have the same quality sensitivity 𝜃. We will relax this assumption as a model extension in Section 6.2 and numerically verify that
all the main results hold qualitatively when considering heterogeneous quality sensitivity.
Conspicuous consumers are snobbish and wish to be different from all other consumers (Arifoğlu et al., 2020). Specifically,
they receive positive social value from the product exclusivity (Rao and Schaefer, 2013). The social value linearly decreases in the
consumption (i.e., number of consumers who use the product), which is denoted by 𝛽. In other words, 𝛽 (0 < 𝛽 < 1) denotes the
conspicuousness degree of conspicuous consumers. As is common in the literature, we assume that conspicuous consumers form
rational expectation about the market demand (Becker, 1991; Jerath et al., 2010). The utility of conspicuous consumers depends
not only on the basic valuation of the product, but also on the number of people who buy the product, which thus is given as
( )
𝑈1 = 𝜃𝑞 − 𝛾𝑝 − 𝛽 𝐷1 + 𝐷2 , (1)
where 𝛾 (0 < 𝛾 < 1) captures the sensitivity of consumers to product price 𝑝. The term −𝛽(𝐷1 + 𝐷2 ) implies that the more products
sold in the market, the less utility for conspicuous consumers.
The utility function of non-conspicuous consumers is given as
𝑈2 = 𝜃𝑞 − 𝑝, (2)
here we set the price sensitivity to be 1 to reflect that non-conspicuous consumers are more price sensitive than the conspicuous
consumers in reality. The parameters and decision variables involved are given in Table 1.
4. Pricing and quality decisions
In this section, we investigate the impact of conspicuous consumers on pricing and quality decisions. In order to ensure the
1
existence of a positive game equilibrium, we assume 𝛽 < 1∕(2𝛼 2 𝛾𝑘 − 2𝛼 2 𝑘 + 2𝛼𝑘), 𝛼 < min{1, 2(1−𝛾) },1 which implies that consumers’
conspicuousness degree and proportion should not be too high.
1 The positive game equilibrium requires the product quality, price, demands from two kinds of consumers and profit in equilibrium to be positive,
i.e., 𝑞 ∗ , 𝑝∗ , 𝐷1∗ , 𝐷2∗ , 𝜋 ∗ > 0.
4
Consumers will buy the product only when their respective utilities are positive, i.e., 𝑈1 , 𝑈2 > 0. We denote the values of
consumers’ willingness to pay that make 𝑈1 = 0, 𝑈2 = 0 as 𝜃1 , 𝜃2 respectively. The demand from non-conspicuous consumers,
therefore, is given as
( ) 𝑝
𝐷2 = 1 − 𝜃2 (1 − 𝛼) = (1 − ) (1 − 𝛼) . (3)
𝑞
Substituting Eq. (3) into (1), we can obtain
( )
1 𝑝
𝜃1 = 𝛾𝑝 + 𝛽(1 − ) (1 − 𝛼) + 𝛽𝐷1 . (4)
𝑞 𝑞
Thus, the demand from conspicuous consumers is
( ( ))
( ) 1 𝑝
𝐷1 = 1 − 𝜃1 𝛼 = 1 − 𝛾𝑝 + 𝛼𝛽 + (1 − 𝛼) 𝛽(1 − ) 𝛼. (5)
𝑞 + 𝛼𝛽 𝑞
Furthermore, the profit function of the firm is
1 2
𝜋 = 𝑝(𝐷1 + 𝐷2 ) − 𝑘𝑞 . (6)
2
By solving the profit maximization problem with the objective function (6), we have the following results. All proofs of the
results are given in Appendix.
Proposition 1. The equilibrium quality, price and profit are as follows

1 − 8𝑘𝛼𝛽𝑚 + 𝑛
𝑞∗ = , (7)
8𝑘𝑚
1 − 8𝑘𝛼𝛽𝑚 + 𝑛
𝑝∗ = , (8)
16𝑘𝑚2
(𝑛 − 3)(1 − 8𝑘𝛼𝛽𝑚 + 𝑛)2
𝜋∗ = , (9)
128𝑘𝑚2 (1 + 𝑛)
√
with 𝑚 = 1 + 𝛾𝛼 − 𝛼, 𝑛 = 1 + 16𝑘𝛼𝛽𝑚, and the respective demands from conspicuous consumers and non-conspicuous consumers are as
follows
𝛼(2𝑚 − 𝛾)(1 + 𝑛) − 8𝑘𝛼𝛽𝑚2
𝐷1∗ = , (10)
2𝑚(1 + 𝑛)
(2𝑚 − 1)(1 − 𝛼)
𝐷2∗ = . (11)
2𝑚
From Proposition 1, we can easily derive Corollaries 1 to 4.
Corollary 1. The firm would only serve the conspicuous consumers when 𝑘𝛽 < (2 𝑚 − 𝛾)((2 𝑚 − 𝛾)𝛼 + 𝑚)∕4𝑚3 and 1∕(2(1 − 𝛾)) ≤ 𝛼 are
satisfied, i.e., 𝐷1∗ > 0, 𝐷2∗ = 0.
Corollary 1 shows that when the quality investment efficiency is high and the conspicuousness degree is low, the firm would
pay attention to conspicuous consumers and formulate corresponding quality and pricing strategies to serve part of conspicuous
demand in the market. Moreover, when the conspicuous consumers’ proportion is high and price-sensitivity is low, the firm would
pay no attention to the demand from non-conspicuous consumers because the benefits brought by the high segment of the low-
price-sensitivity conspicuous consumers can make up the benefits bought by the low segment of the high-sensitivity non-conspicuous
consumers.
Corollary 2. The conspicuous demand decreases with the conspicuousness degree and increases with quality investment efficiency. The non-
conspicuous demand decreases with the proportion of conspicuous consumers but increases with their price sensitivity, and is independent of
quality investment efficiency and conspicuousness degree.
Corollary 2 illustrates that the conspicuousness psychology has a negative effect on conspicuous demand. Meanwhile, a higher
quality investment cost from a lower quality investment efficiency incurs a relatively lower product quality, which leads to the
reduction of the conspicuous demand. Furthermore, the non-conspicuous demand decreases with the proportion of the conspicuous
consumers, which is consistent with the intuition. Besides, the increase of conspicuous consumers’ price sensitivity reduces the
conspicuous demand, which leads to the increase of non-conspicuous consumers’ demand.
Corollary 3. The product price, quality, and profit decrease respectively with the conspicuousness degree.
Corollary 3 shows an intuition that the firm’s profit, product price and quality always decrease with the conspicuousness degree.
As the conspicuousness degree increases, the greater disutility from conspicuous psychology leads to a lower marginal return of
quality investment, thus would always hurt the firm by leading to lower quality and price.
5
Because the price sensitivity of conspicuous consumers is not as high as that of non-conspicuous consumers, in the following,
we will show an interesting result that the firm may benefit from conspicuous consumers despite the presence of the negative
effect of conspicuous psychology. Specifically, the impacts of conspicuous consumers on the firm’s profit will depend on the quality
investment efficiency and the conspicuousness degree considering different price sensitivity levels, which are presented as follows.
Proposition 2. The effects of 𝛼 on the firm’s profit 𝜋 are as follows:
(1) when 0 < 𝛾 < 1∕2 ∶ 𝜋 increases with 𝛼 if 0 <𝑘𝛽 ≤ (1 − 𝛾)∕4 (Case I), 𝜋 decreases first and then increases in 𝛼 with the turning point
𝛼̃ if (1 − 𝛾)∕4<𝑘𝛽 < 2 − 2𝛾 (Case II), and 𝜋 decreases with 𝛼 if 𝑘𝛽 ≥ 2 − 2𝛾 (Case III);
(2) when 1∕2 < 𝛾 < 1 ∶ 𝜋 increases with 𝛼 if 0 <𝑘𝛽 ≤ (1 − 𝛾)∕4 (Case IV), 𝜋 decreases first and then increases in 𝛼 with the turning
point 𝛼̃ if (1 − 𝛾)∕4<𝑘𝛽 < (1 − 𝛾)∕4𝛾 3 (Case V), and 𝜋 decreases with 𝛼 if 𝑘𝛽 ≥ (1 − 𝛾)∕4𝛾 3 (Case VI).
The threshold 𝛼̃ is given in Appendix.
Note that the conspicuous consumers’ price sensitivity is not as high as that of non-conspicuous consumers for the case 0 < 𝛾 < 1.
On the one hand, the presence of conspicuous consumers reduces the sensitivity of demand with respect to price, which is beneficial
to the firm for the potential to raise price and then get more marginal revenue, and we term it as positive effect. On the other hand,
high conspicuous psychology has a negative effect on the demand, which will hurt the firm, and we term it as negative effect.
When 𝛽 is relatively small, low conspicuous psychology has less negative impact on demand, thus, the positive effect of
conspicuous consumers’ low price sensitivity on marginal revenue dominates, which leads the firm to benefit from the presence of
conspicuous consumers. Besides, if 𝑘 is also relatively small, high quality investment efficiency motivates the firm to improve quality
actively, which leads to a relatively high demand. Meanwhile, the positive effect brought by conspicuous consumers’ low price
sensitivity on marginal revenue magnifies the benefits of quality investment with high quality due to the presence of conspicuous
consumers, which ultimately makes the positive effect dominate the negative effect of conspicuous consumers. Therefore, when 𝑘𝛽
is relatively small, the firm’s profit increases with the proportion of conspicuous consumers.
When 𝛽 is quite large, the negative effect brought by high conspicuous psychology on demand dominates the positive effect
brought by conspicuous consumers’ low price sensitivity on marginal revenue, which hurts the firm. Besides, when 𝑘 is also quite
large, the firm will reduce quality investment because of the low quality investment efficiency, which leads to a lower demand.
Furthermore, the benefit from quality investment with a relatively low quality cannot be effectively magnified by the positive effect
of conspicuous consumers regarding marginal revenue. Therefore, the presence of conspicuous consumers has a negative impact on
the firm when 𝑘𝛽 is quite large.
More interestingly, when 𝑘𝛽 is moderate, the positive effect and negative effect match each other, and the conspicuous consumers’
impact on profit significantly depends on the conspicuous consumers’ proportion in the market itself. Specifically, when 𝛼 is relatively
small, which implies that most of consumers care much about price, the positive effect from conspicuous consumers on marginal
revenue is not obvious, while the negative effect brought by conspicuous psychology on the demand dominates. Hence, when 𝛼
is already low (i.e., 𝛼 < 𝛼),
̃ the profit decreases with 𝛼. When 𝛼 is relatively large (i.e., 𝛼 > 𝛼),
̃ the positive effect of lower price
sensitivity dominates. Hence the profit increases with 𝛼. To sum up, the profit shows a non-monotonic trend with respect to 𝛼, and
first decreases then increases as 𝛼 increases.
Besides, when conspicuous consumers’ price sensitivity is relatively small (0 < 𝛾 < 1∕2), the advantage of low price sensitivity
of demand becomes more obvious, which is more likely to dominate the negative effect of conspicuous psychology on demand
compared to the case of 𝛾 > 1∕2. Therefore, comparing Proposition 2(1) and (2) shows that a relatively lower 𝛾 (0 < 𝛾 < 1∕2) leads
to a smaller parameters region hurting the firm by the conspicuous consumers, a larger parameters region benefiting the firm, and
also a larger parameters region with exhibiting the profit’s non-monotonic trend with respect to the conspicuous consumers. This
result provides a reasonable explanation about why luxury brands always get more profit from high-priced and scarce products. For
example, the main reason for Hermes’ continued growth in profits is that its core products, such as Birkin and Kelly bag, continue
to be popular in the market. By providing high-priced products, they only serve low-price sensitive consumers and satisfy their
conspicuous psychology to obtain high profits. When facing consumers with higher price sensitivity, the firm must make a tradeoff
between the positive and negative effects of consumers’ price sensitivity, quality investment efficiency and conspicuousness degree
on them.
In the previous analysis, we consider the case that conspicuous consumers have lower price sensitivity. The results show that, in
some cases, the presence of conspicuous consumers with lower price sensitivity is beneficial to the price, quality and profit of the
firm. Next, we assume that conspicuous and non-conspicuous consumers are equally price sensitive, i.e., 𝛾 = 1, to explore whether
the presence of conspicuous consumers is still beneficial to the firm when the advantage of their low price sensitivity disappears.
Corollary 4. When 𝛾 = 1, the product price, quality, and profit decrease respectively with the proportion of conspicuous consumers and
the conspicuousness degree.
When the advantage of conspicuous consumers’ low price sensitivity disappears, we can see from Corollary 4 that as the
proportion of conspicuous consumers and the conspicuousness degree increase, the greater disutility from conspicuous psychology
leads to a lower marginal return of firm’s quality investment, thus leads to a lower product quality. For a given quality sensitivity,
the utility of conspicuous consumers is smaller than that of non-conspicuous consumers. It can be seen that the more conspicuous
consumers there are, the less favorable it is for the firm to raise price, which further leads to the loss of the firm’s profit. Therefore,
both the proportion of conspicuous consumers and the conspicuousness degree have negative effects on the product price, quality
6
Fig. 1. Strategic complementarity region with 𝑘 = 0.3, 𝛽 = 0.3, 𝛼 = 0.6, 𝛾 = 0.6. (For interpretation of the references to color in this figure legend, the reader is
referred to the web version of this article.)
and profit. In other words, the presence of conspicuous consumers always hurts the firm by leading to lower quality and price
regardless of the proportion of the conspicuous consumers and the conspicuousness degree when conspicuous and non-conspicuous
consumers are equally price sensitive.
2 2 (𝑞+𝛼𝛽)
Let 𝜋(𝑝, 𝑞) represent the profit function. According to Eqs. (3), (5) and (6), we have 𝜋(𝑝, 𝑞) = 2𝑝𝑞−2𝑝 (1−𝛼(1−𝛾))−𝑘𝑞
2(𝑞+𝛼𝛽)
. 𝜋(𝑝∗ , 𝑞)
denotes the profit function that optimizes only for price, and 𝜋(𝑝, 𝑞 ∗ ) denotes the profit function that optimizes only for quality.
Then 𝜋(𝑝∗ , 𝑞 ∗ ) denotes the profit function with both price and quality optimized simultaneously, which is presented in (9).
By optimizing the price and the quality of profit function respectively, we have 𝜋(𝑝∗ , 𝑞) and 𝜋(𝑝, 𝑞 ∗ ) as follows.
( )
1 1
𝜋(𝑝∗ , 𝑞) = 𝑞 2 − 2𝑘 , (12)
4 (𝑞 + 𝛼𝛽) 𝑚
6𝐴𝑘𝑝2 𝑚 + 𝑝 (𝐵 + 4𝐴𝑘𝛼𝛽) (𝐵 + 4𝐴𝑘𝛼𝛽)2
𝜋(𝑝, 𝑞 ∗ ) = − (13)
𝐵 − 2𝐴𝑘𝛼𝛽 72𝐴2 𝑘
( √ )1∕3 √
( )2 3
with 𝐴 = 𝑘2 (27𝑝 (𝛼𝛽 + 𝑝𝑚)) + 2𝑘𝛼 3 𝛽 3 − 4𝑘2 𝛼 6 𝛽 6 − 2𝑘3 𝛼 3 𝛽 3 − 27𝑘2 𝑝 (𝛼𝛽 + 𝑝𝑚) , 𝐵 = 22∕3 𝐴2 + 2 2𝛼 2 𝛽 2 𝑘2 .
Denote 𝛥 = 𝜋(𝑝∗ , 𝑞 ∗ ) − 𝜋(𝑝, 𝑞), 𝛥𝑝 = 𝜋(𝑝∗ , 𝑞) − 𝜋(𝑝, 𝑞), 𝛥𝑞 = 𝜋(𝑝, 𝑞 ∗ ) − 𝜋(𝑝, 𝑞). Hence, the complementarity of joint strategies for the
price and quality holds if 𝛥 > 𝛥𝑝 + 𝛥𝑞. Define 𝐽 (𝑝, 𝑞) ≜ 𝛥 − (𝛥𝑝 + 𝛥𝑞) = 𝜋(𝑝∗ , 𝑞 ∗ ) + 𝜋(𝑝, 𝑞) − 𝜋(𝑝∗ , 𝑞) − 𝜋(𝑝, 𝑞 ∗ ), which is
(𝑛 − 3)(1 − 8𝑘𝛼𝛽𝑚 + 𝑛)2 2𝑝𝑞 − 2𝑝2 𝑚 − 𝑘𝑞 2 (𝑞 + 𝛼𝛽)
𝐽 (𝑝, 𝑞) = +
128𝑘𝑚2 (1 + 𝑛) 2 (𝑞 + 𝛼𝛽)
( ) (14)
(𝐵 + 4𝐴𝑘𝛼𝛽)2 6𝐴𝑘𝑝2 𝑚 + 𝑝 (𝐵 + 4𝐴𝑘𝛼𝛽) 1 2 1
+ − − 𝑞 − 2𝑘 .
72𝐴2 𝑘 𝐵 − 2𝐴𝑘𝛼𝛽 4 (𝑞 + 𝛼𝛽) 𝑚
Due to the complexity of function, we use numerical studies to verify whether the strategic complementarity holds, i.e., 𝐽 (𝑝, 𝑞) >
0. Consider the parameters setting: 𝑘 = 0.3, 𝛽 = 0.3, 𝛼 = 0.6, 𝛾 = 0.6 (for other parameters, the results obtained are similar). The
corresponding strategic complementarity region is shown in the yellow region with 𝐽 (𝑝, 𝑞) > 0 of the following figure.
Note that in practice the price and quality of products exhibit positive correlation. So the gray regions I and IV in Fig. 1 belong
̃ to region II,
to invalid regions. For the white areas for region III ̃ the quality increases significantly but the price increases slightly.
̃ III),
In these regions (i.e., II, ̃ consumers are less sensitive to quality, which is inconsistent with the market characteristics of the
setting in the paper where conspicuous consumers value quality highly. So, the valid areas remain in the yellow regions II and III
in which a high quality product corresponds to a high price. Interestingly, we find that the strategic complementarity of price and
quality strategies holds for these two regions II and III (i.e., 𝐽 (𝑝, 𝑞) > 0), which highlights the importance of joint decision-making
on price and quality.
7
Fig. 2. The effects of 𝛼 on 𝑞.
5. Numerical analysis
We resort to numerical analysis to investigate the impacts of 𝛼 on 𝑞, 𝑝, 𝐷1 , 𝐷2 and 𝜋 with respect to 𝑘, 𝛾 and 𝛽, thus find more
subtle explanations and managerial insights. With the given parameters, the effects of 𝛼 are shown in Figs. 2–5, respectively.
Fig. 2 depicts the impacts of the proportion of conspicuous consumers on product quality. It can be seen from Fig. 2(a) that when
𝛾 is relatively small (𝛾 = 0.4), the environment for quality investment is more favorable to the firm due to lower price sensitivity,
which indicates an improved marginal return of quality investment. Meanwhile, a smaller 𝑘 (𝑘 = 0.2) indicates a higher quality
investment, and the benefit from which is magnified by the positive effect of conspicuous consumers. Thus the firm is greatly
motivated to raise product quality even for a large conspicuousness degree (e.g., 𝛽 = 0.8). And the conspicuousness degree plays a
little role in affecting quality. Besides, we can see from Fig. 2(a) that the quality is convexly increasing with respect to 𝛼, which
implies that the conspicuous consumers’ positive effect on marginal revenue becomes more obvious with a larger 𝛼 due to the
relatively small 𝛾 and 𝑘.
Furthermore, we can see from Fig. 2(b) that when 𝛾 is moderate (𝛾 = 0.8), the negative effect brought by conspicuous consumers
also plays an important role. Meanwhile, a lower quality investment efficiency (i.e., 𝑘 = 0.5) incurs a relatively lower product quality.
Thus, regardless of conspicuousness degree, the overall quality will fall compared to that of Fig. 2(a). When 𝛽 is relatively small
(𝛽 = 0.3), the conspicuous psychology’s negative effect on demand is not obvious, while the positive effect dominates, thus motivates
the firm to improve quality actively as 𝛼 increases. When 𝛽 is at a medium level (𝛽 = 0.6), which makes the positive effect match
the negative one, the conspicuous consumers’ impact on quality significantly depends on the conspicuous consumers’ proportion
in the market itself. That is, when 𝛼 is relatively small, due to the small number of conspicuous consumers, the negative effect is
not obvious, and the positive effect from lower price sensitivity plays a greater role. Therefore, the firm still has the motivation
to improve quality. But with a growing number of conspicuous consumers (i.e., 𝛼 is already large), the negative effect eventually
dominates the positive one, which weakens the motivation of the firm to improve product quality, resulting in a relatively low
product quality as 𝛼 increases. When 𝛽 is relatively large (𝛽 = 0.8), the negative effect is more obvious, the marginal return on
improving quality is reduced and the investment environment is no longer suitable for the firm, which leads to a more obvious
quality reduction. Besides, it is shown from Fig. 2 that for any other given parameters, a larger conspicuousness degree 𝛽 implies a
lower quality, which is detrimental to the firm.
Fig. 3 shows the impacts of the proportion of conspicuous consumers on product price. It can be seen from Fig. 3(a) that smaller
𝛾 and 𝑘 (𝛾 = 0.4, 𝑘 = 0.2) imply that the conspicuous consumers’ positive effect on marginal revenue more likely dominates that
of the negative effect on demand, which motivates the firm to raise price as 𝛼 increases even for a large conspicuousness degree
(e.g., 𝛽 = 0.8). And the conspicuousness degree plays a little role in affecting price. Besides, in line with that of the quality, the price
is also convexly increasing with respect to 𝛼 due to the relatively small 𝛾 and 𝑘.
Furthermore, when 𝛾 is moderate (𝛾 = 0.8, Fig. 3(b)), the negative effect also plays an important role. Meanwhile, the quality
investment efficiency is relatively low (i.e., 𝑘 = 0.5), thus, regardless of the conspicuousness degree, the overall price will fall
compared to that of Fig. 3(a). When 𝛽 is relatively small (𝛽 = 0.3), the conspicuous consumers’ positive effect still dominates,
thus leads to a higher price as 𝛼 increases. When 𝛽 is at a medium level (𝛽 = 0.6), the positive effect matches the negative one.
Specifically, when 𝛼 is relatively small, the positive effect of a lower price sensitivity still makes a greater role, so the firm will raise
price as 𝛼 increases. But with a growing number of conspicuous consumers, the negative effect of conspicuous consumers on demand
eventually dominates the positive one. Therefore, the firm lowers the price to maintain a proper demand. When 𝛽 is relatively large
(𝛽 = 0.8), the negative effect on demand is more obvious, which leads to a more obvious price reduction. Besides, it is shown that
for any other given parameters, a larger conspicuousness degree 𝛽 implies a lower price.
8
Fig. 3. The effects of 𝛼 on 𝑝.
Fig. 4. The effects of 𝛼 on 𝐷1 and 𝐷2 .
Fig. 4 depicts the impacts of the proportion of conspicuous consumers on the demands from conspicuous consumers and non-
conspicuous consumers. In Fig. 4(a), we set the conspicuousness degree to a medium level, i.e., 𝛽 = 0.6 to investigate the effects
of the proportion of conspicuous consumers on the conspicuous demand with respect to 𝛼 under different 𝛾 and 𝑘. Furthermore, as
the demand from non-conspicuous consumers only affected by 𝛼 and 𝛾, we set 𝛾 = 0.4, 0.6, 0.8 respectively in Fig. 4(b) to investigate
the effects of the proportion of conspicuous consumers on non-conspicuous demand.
As shown in Fig. 4(a), for a moderate price sensitivity 𝛾 of conspicuous consumers (e.g., 𝛾 = 0.8), the demand from conspicuous
consumers increases with the proportion of the conspicuous consumers, which is consistent with the intuition. However, when 𝛾
is relatively small (𝛾 = 0.4), the firm will choose to continue to raise the product quality and price greatly due to the low price
sensitivity (i.e., convexly increasing as shown from Figs. 2(a) and 3(a)), while an especially high price, in turn, has a negative
impact on conspicuous demand, resulting in a slight decrease in conspicuous demand when 𝛼 is close to 1. In other words, a large
margin dominates that of demand in the role of maximizing profit which allows a lower demand as an already large 𝛼 further
increases. Besides, the firm will reduce quality investment because of low quality investment efficiency (i.e., 𝑘 = 0.5), which leads
to a relatively low conspicuous demand compared to the case of 𝑘 = 0.2 due to a lower quality. Moreover, we can see from Fig. 4(b)
that non-conspicuous demand always decreases with the proportion of the conspicuous consumers regardless of the price sensitivity.
Additionally, a larger price sensitivity implies less attractiveness of conspicuous consumers, which makes the firm put more attention
on non-conspicuous consumers, thus leads to a larger non-conspicuous demand.
Fig. 5 as a graphic illustration of Proposition 2, shows how the proportion of conspicuous consumers affects the profit. When
𝑘𝛽 is relatively small, the conspicuous consumers’ positive effect dominates, which leads the firm to benefit from the presence of
conspicuous consumers. When 𝑘𝛽 is relatively large, the negative effect dominates, which hurts the firm. Specifically, we can see
9
Fig. 5. The effects of 𝛼 on 𝜋 with 𝛾 = 0.8.
from Fig. 5 that when 𝑘𝛽 is relatively large (𝑘 = 0.2, 𝛽 = 0.8), the conspicuous demand is small in the market, and the non-conspicuous
demand decreases as 𝛼 increases (as shown from Corollary 2 and Fig. 4(b)). Meanwhile, the higher 𝑘 and 𝛽 enlarge the negative
effect, which accelerate the reduction of the firm’s profit. Therefore, the presence of conspicuous consumers has a negative impact
on the firm. When 𝑘𝛽 is moderate, the positive effect and negative effect match each other. The profit shows a non-monotonic trend
with respect to 𝛼, and first decreases then increases as 𝛼 increases.
6. Extensions
In this section, we provide additional discussions on the key model assumptions and related issues. Specifically, we consider the
following alternative model specifications: We extend our basic model to a supply chain to explore whether such a model setting will
affect our main results in Section 6.1, consider heterogeneous quality sensitivity that the two types of consumers have in Section 6.2,
and relax the assumption of unit production cost in Section 6.3. Moreover, we consider the product line decision in Section 6.4. In
the subsequent analysis and discussions, we will demonstrate that our main results remain qualitatively valid.
6.1. Supply chain environment
In the basic model, we only consider one monopolist who produces and sells a conspicuously consumed status product. In this
section, we extend our model to a supply chain composed of one manufacturer and one retailer to explore if the results still hold.
The manufacturer provides the product to the retailer with a wholesale price 𝑤, then the retailer sells the product to consumers
with a retail price 𝑝.
The sequence of the game is as follows. First, the manufacturer sets product quality 𝑞 with cost 𝑘𝑞 2 ∕2. Then, the retailer decides
the marginal revenue 𝜂. Finally, the manufacturer decides the wholesale price 𝑤 (note that 𝑝 = 𝑤 + 𝜂). The utility function
of consumers and the demands from conspicuous consumers and non-conspicuous consumers are consistent with the monopoly
situation for a given retail price 𝑝. Here we only consider the interesting case when the conspicuous consumers’ price sensitivity is
not as high as the non-conspicuous consumers’, i.e., 0 < 𝛾 < 1.
Hence, the profits for the retailer 𝜋𝑅 and the manufacturer 𝜋𝑀 are
( )
𝜋𝑅 = 𝜂 𝐷1 + 𝐷2 , (15)
( ) 𝑘𝑞 2
𝜋𝑀 = 𝑤 𝐷1 + 𝐷2 − , (16)
2
respectively. The two parties set the optimal strategies to maximize their respective profits. By using backward induction to solve
the Stackelberg game, we can obtain the following results.
Proposition 3. The equilibrium quality, wholesale price and marginal revenue are as follows
1 + 𝑛̂ − 32𝑘𝛼𝛽𝑚
𝑞̂ = , (17)
32𝑘𝑚
1 + 𝑛̂ − 32𝑘𝛼𝛽𝑚
𝑤̂ = , (18)
128𝑘𝑚2
1 + 𝑛̂ − 32𝑘𝛼𝛽𝑚
𝜂̂ = , (19)
64𝑘𝑚2
10
√
with 𝑛̂ = 1 + 64𝑘𝛼𝛽𝑚, and the demands from two types of consumers are
̂ − 32𝑘𝛼𝛽𝑚2
𝛼(4𝑚 − 3𝛾)(1 + 𝑛)
𝐷̂ 1 = , (20)
4𝑡 (1 + 𝑛)
̂
(𝛼 − 1) (3 − 4𝑚)
𝐷̂ 2 = . (21)
4𝑚
The profits for the retailer and the manufacturer are as follows
(1 + 𝑛̂ − 32𝑘𝛼𝛽𝑚)2
𝜋̂ 𝑅 = , (22)
̂ 𝑚2
256𝑘 (1 + 𝑛)
̂ (1 + 𝑛̂ − 32𝑘𝛼𝛽𝑚)2
(3 − 𝑛)
𝜋̂ 𝑀 = . (23)
̂ 𝑚2
2048𝑘 (1 + 𝑛)
From Proposition 3, we can also derive Corollaries 5 and 6.
Corollary 5. The retailer would serve the conspicuous consumers in the market only when 𝑘𝛽 < (4𝛼 2 (𝛾 − 1) + (3 − 2𝛾) 𝛼 + 1)∕(16 (1 + 𝛼 (𝛾
−1)) 3 ) is satisfied, i.e., 𝐷̂ 1 > 0.
Corollary 6. The product retail price and quality, the profits of the manufacturer and the retailer decrease with the conspicuousness degree.
Corollaries 5 and 6 are consistent with our analysis in Section 5. Specifically, when the quality investment efficiency is high
and the conspicuousness degree is low, the supply chain will pay attention to conspicuous consumers and formulate corresponding
pricing and quality strategies to serve part of conspicuous demand in the market. In addition, the profits of the manufacturer and
the retailer, the product retail price and quality always decrease as 𝛽 increases, which is also consistent with the previous analysis
in the monopoly situation that the conspicuousness psychology always hurts the firm by reducing demand.
Similar to the monopoly situation, we numerically find that when 𝛾 is relatively small, the product quality, retail price and profits
for the manufacturer and the retailer increase with the proportion of conspicuous consumers as shown in Figs. 6(a), (c) and 7(a),
(c). That is, the presence of conspicuous consumers always benefits the supply chain when conspicuous consumers’ price sensitivity
is relatively low. When 𝛾 is moderate, the product quality, retail price and profits for the manufacturer and the retailer show a
non-monotonic trend with respect to the proportion of conspicuous consumers as shown in Figs. 6(b), (d) and 7(b), (d). In this case,
the quality investment efficiency and the conspicuousness degree play important roles in affecting chain members’ profits, prices
and product quality. The above analysis is consistent with the findings in the monopoly case, which verifies the robustness of the
main results.
𝜋̂ +𝜋̂
Moreover, we define SE = R𝜋 ∗ M as the supply chain efficiency, i.e., the ratio of the total profits of the firms under decentralized
decision-making to that under centralized decision-making. We use numerical example to illustrate the effect of the proportion of
conspicuous consumers on chain efficiency as shown in Fig. 8.
It can be seen from Fig. 8 that SE shows a non-monotonic trend with respect to 𝛼, and first decreases then increases as 𝛼 increases.
That is, when 𝛼 is relatively small, the presence of conspicuous consumers aggravates the double marginalization, and when 𝛼 is
relatively large, the presence of conspicuous consumers alleviates the double marginalization. The reason behind is that, for the
already high 𝛼, the supply chain members both mainly benefit from conspicuous consumers with relatively low price sensitivity
𝛾. The double marginalization effect in the supply chain leads to higher selling price for consumers and less demand compared to
centralized decision-making case, which ultimately enhances the profitability of chain members from conspicuous consumers. In
other words, the negative effect of double marginalization on the supply chain is mitigated by conspicuous consumers when their
proportion is relatively high.
6.2. Heterogeneous quality sensitivity
We now relax the assumption that the conspicuous and non-conspicuous consumers have the same quality sensitivity. Specifically,
we assume that the conspicuous consumers have higher quality sensitivity than the non-conspicuous consumers, which is consistent
with realistic observation. Therefore, the utility functions of conspicuous consumers and non-conspicuous consumers are as
follows
𝑈1 = 𝜃𝑞 − 𝛾𝑝 − 𝛽(𝐷1 + 𝐷2 ), (24)
̃ − 𝑝,
𝑈2 = 𝜃𝑞 (25)
where 𝜃̃ = 𝛿𝜃, 𝛿 (0 < 𝛿 < 1) captures the non-conspicuous consumers have the lower quality sensitivity. Consumers will buy the
product only when their respective utilities are positive, i.e., 𝑈1 , 𝑈2 > 0. Consistent with the previous notations, we denote the
values of consumers’ WTP that make 𝑈1 = 0, 𝑈2 = 0 as 𝜃1 , 𝜃2 respectively, then we can conclude that
( )
𝛽 𝐷1 + 𝐷2 + 𝛾𝑝
𝜃1 = , (26)
𝑞
𝑝
𝜃2 = . (27)
𝛿𝑞
11
Fig. 6. The effects of 𝛼 on 𝑝, 𝑞.
Therefore, the demands from conspicuous consumers and non-conspicuous consumers are given as
( ) 𝛼 𝑝
𝐷1 = 𝛼 1 − 𝜃1 = (𝑞 − 𝛽(𝐷1 + (1 − 𝛼)(1 − ) − 𝛾𝑝)), (28)
𝑞 𝛿𝑞
( )
( ) 𝑝
𝐷2 = (1 − 𝛼) 1 − 𝜃2 = (1 − 𝛼) 1 − . (29)
𝛿𝑞
By solving the firm’s profit maximization problem, we have the following results. All proofs of the results are given in Appendix.
Proposition 4. The equilibrium quality, price and marginal profit are as follows
√
𝛿 − 8𝑘𝛼𝛽 𝑚̃ + 𝛿 𝑛̃
𝑞̃ = , (30)
8𝑘𝑚̃
( √ )
𝛿 𝛿 − 8𝑘𝛼𝛽 𝑚̃ + 𝛿 𝑛̃
𝑝̃ = , (31)
16𝑘𝑚̃ 2
12
Fig. 7. The effects of 𝛼 on 𝜋𝑟 , 𝜋𝑚 .
( √ )( √ )2
3 𝛿 − 𝑛̃ 𝛿 − 8𝑘𝛼𝛽 𝑚̃ + 𝛿 𝑛̃
𝜋̃ = ( √ ) , (32)
128𝑘𝑚̃ 2 𝑛̃ + 𝛿
√
̃ and the demands from two types of consumers are
with 𝑚̃ = 1 + 𝛾𝛼𝛿 − 𝛼, 𝑛̃ = 𝛿 + 16𝑘𝛼𝛽 𝑚,
( )
1 2 − 2𝛼 𝑛̃
𝐷̃ 1 = − √ − 1 + 𝛼, (33)
4 𝑚̃ 𝛿
(1 − 𝛼) (2𝑚̃ − 1)
𝐷̃ 2 = . (34)
2𝑚̃
Corollary 7. The product price, quality and profit decrease respectively with the conspicuousness degree.
The results also show that the conspicuousness degree has a negative effect on product price, quality and the firm’s profit. Due to
the complexity of the model, we use numerical analysis to illustrate the effects of the proportion of conspicuous consumers on profit
of the firm when considering the consumers have heterogeneous quality sensitivity. Specifically, we set 𝛿 = 0.4 and 𝛿 = 0.7 in Figs. 9
13
Fig. 8. The effect of 𝛼 on SE with 𝑘 = 0.2, 𝛽 = 0.5, 𝛾 = 0.3.
Fig. 9. The effects of 𝛼 on 𝜋 when 𝛿 = 0.4.
and 10, respectively, to explore the effect of the proportion of conspicuous consumers on the firm’s profit under heterogeneous price
sensitivity and quality sensitivity.
We can see from Figs. 9 and 10 that in the cases of heterogeneous quality sensitivity, the results are both consistent with the
interesting findings in Proposition 2. That is, the impacts of the conspicuous consumers on the firm’s profit will depend on the
quality investment efficiency and the conspicuousness degree considering different price sensitivity. Numerical analysis shows that
considering heterogeneous quality sensitivity will not qualitatively change the results obtained in our main model.
6.3. A positive marginal production cost
In the basic model, we assume that the marginal production cost of the product is normalized to zero and only consider the
one-shot quality investment cost. Here, we relax this assumption to check the robustness of our results obtained in the basic model.
Specifically, the product with quality 𝑞 incurs a unit production cost 𝑐(𝑞).
̄ Following the seminal works of Moorthy (1988) and Desai
(2001), we assume that 𝑐(𝑞) ̄ = 𝑘𝑞̄ 2 ∕2 + 𝑐0 , where 𝑘̄ reflects the production efficiency associated with the variable cost per unit, and
the constant parameter 𝑐0 reflects the fixed cost per unit which is here normalized to zero for simplicity. In addition, we omit the
one-shot quality investment cost for simplicity which in fact has been partially integrated in the production cost. Hence the firm’s
( )
profit is 𝜋 = (𝑝 − 𝑐(𝑞))
̄ 𝐷1 + 𝐷2 . We analyze the pricing and quality decisions following the same decision sequence and summarize
our findings as follows.
14
Fig. 10. The effects of 𝛼 on 𝜋 when 𝛿 = 0.7.
Proposition 5. The equilibrium quality, price and marginal profit are as follows
̄
1 + 𝑛̄ − 2𝑘𝛼𝛽𝑚
𝑞̄ = , (35)
̄
3𝑘𝑚
̄
(1 + 𝑛̄ − 2𝑘𝛼𝛽𝑚)(7 ̄
+ 𝑛̄ − 2𝑘𝛼𝛽𝑚)
𝑝̄ = , (36)
̄ 2
36𝑘𝑚
̄
(𝑛̄ − 2𝑘𝛼𝛽𝑚 ̄
− 5)2 (1 + 𝑛̄ − 2𝑘𝛼𝛽𝑚) 2
𝜋̄ = , (37)
̄ 2 (1 + 𝑛̄ + 𝑘𝛼𝛽𝑚)
432𝑘𝑚 ̄
√
̄
with 𝑛̄ = 1 + 4𝑘𝛼𝛽𝑚(𝛼𝛽 ̄ + 2), and the demands from two types of consumers are
𝑘𝑚
̄ + 𝑛̄ + 3) − 4𝛼 2 (1 − 𝛾 + 𝑘𝛽)
1 − 𝑛̄ + 𝛼(2𝑘𝛽 ̄ + 2𝛼 3 𝑘𝛽
̄
𝐷̄ 1 =
4𝑚 (38)
̄ 2 𝛽𝛾(4𝛼𝛾 + 7 − 7𝛼) − 2𝛼𝛾(1 + 𝑛)
𝑘𝛼 ̄
− ,
6𝑚
(1 − 𝛼)(5 − 𝑛
̄ + 2𝛼( ̄
𝑘𝛽𝑚 + 6(𝛾 − 1)))
𝐷̄ 2 = . (39)
12𝑚
Corollary 8. The firm’s profit decreases with the conspicuousness degree.
Fig. 11 shows the effect of the proportion of conspicuous consumers on the firm’s profit. The result when considering a variable
marginal production cost is qualitatively consistent with that of a negligible marginal production cost. That is, the impacts of the
conspicuous consumers on the firm’s profit will depend on the conspicuous consumers’ conspicuousness degree, price sensitivity,
and production efficiency (analogic to the investment efficiency in the basic model). Numerical analysis shows that considering the
variable marginal production cost will not qualitatively change the results obtained in our main model, which verifies the robustness
of the main findings.
6.4. Product line setting
In this subsection, we consider the case under which the firm can provide products with different qualities aiming to serve
conspicuous and non-conspicuous consumers respectively. Specifically, high-end product with high-quality 𝑞𝐻 and price 𝑝𝐻 and
low-end product with low-quality 𝑞𝐿 and price 𝑝𝐿 . Consumers who observe the products make their purchase decisions according
to their utility obtained by the product. Hence for the conspicuous and non-conspicuous consumers respectively, we have
𝑈1 = 𝜃𝑞𝑗 − 𝛾𝑝𝑗 − 𝛽𝐷𝑗 , (40)
𝑈2 = 𝜃𝑞𝑗 − 𝑝𝑗 , 𝑗 ∈ {𝐻, 𝐿}. (41)
We use 𝜃1𝐻 to represent the marginal conspicuous consumers who are indifferent between buy the high-end products and low-end
products, and use 𝜃1𝐿 to represent the marginal conspicuous consumers who are indifferent between buy the low-end products and
15
Fig. 11. The effects of 𝛼 on 𝜋.
Table 2
Firm’s optimal profits under product line versus single product for the varying conspicuousness degree.
𝛽 0.1 0.2 0.3 0.4 0.6 0.8 1
𝜋𝑑 0.16021 0.14582 0.13268 0.12064 0.09946 0.08159 0.06651
𝜋𝑠 0.16866 0.14902 0.13148 0.11579 0.08912 0.06771 0.05057
nothing. Similarly, 𝜃2𝐻 represents the marginal non-conspicuous consumers who are indifferent between buy the high-end products
and low-end products, and 𝜃2𝐿 represents the marginal non-conspicuous consumers who are indifferent between buy the low-end
products and nothing. Hence, we have
𝐷𝐻 = 𝛼(1 − 𝜃1𝐻 ) + (1 − 𝛼)(1 − 𝜃2𝐻 ), (42)
𝐷𝐿 = 𝛼(𝜃1𝐻 − 𝜃1𝐿 ) + (1 − 𝛼)(𝜃2𝐻 − 𝜃2𝐿 ). (43)
The profit function of the firm is

2
𝑘𝑞𝐻 𝑘𝑞 2
𝜋 = 𝑝𝐻 𝐷𝐻 + 𝑝𝐿 𝐷𝐿 − − 𝐿. (44)
2 2
The analytical solutions of price and quality are hard to obtain due to the complexity. We demonstrate numerically that our
main findings still hold in the case of product line design. First of all, we compare numerically the equilibrium profits of single
product and product line, and show the firm’s optimal product line choice for the given parameters. Specifically, 𝜋𝑑 denotes the
firm’s optimal profit when it produces two types of products and 𝜋𝑠 denotes the firm’s optimal profit when it produces only one
type of product. The results are shown in Table 2 for the parameters 𝑘 = 0.4, 𝛼 = 0.6, 𝛾 = 0.4.
It is shown that whether the firm can benefit from product line setting is conditional on the system parameters. For those
presented in Table 2, we find that a large conspicuousness degree incentives the firm to adopt product line setting. For the parameters
where the product line strategy dominates the single product strategy, Fig. 12 shows that the firm’s profit also exhibits a non-
monotonic trend with the proportion of conspicuous consumers, which verifies the robustness of the results obtained in the basic
model for a single product setting.
7. Conclusion and managerial implications
7.1. Conclusion
In this paper, we consider one firm who sells a conspicuously consumed status product to two segments of consumers: conspicuous
consumers who pursue exclusivity and non-conspicuous consumers. We investigate the impacts of conspicuous consumers on firm’s
pricing, quality decisions and profit. We further discuss four model extensions, including extending our framework to the supply
chain environment composed of one manufacturer and one retailer, considering heterogeneous quality sensitivity, a positive marginal
production cost and product line decision, to verify the robustness of the results obtained in the basic model. Our results are
concluded as follows.
16
Fig. 12. The effect of 𝛼 on the optimal profit 𝜋 ∗ under product line with 𝑘 = 0.4, 𝛽 = 0.8, 𝛾 = 0.4.
(1) When conspicuous consumers’ price sensitivity is quite high (e.g., approaching to that of non-conspicuous consumers), the
presence of conspicuous consumers always hurts the firm by leading to lower quality and price regardless of the proportion of
conspicuous consumers and the conspicuousness degree. (2) Our analysis shows that only when the quality investment efficiency is
high and the conspicuousness degree is low, the firm would serve the conspicuous consumers endowed with a given price sensitivity.
(3) When the price sensitivity of conspicuous consumers is relatively low, the product quality and price always increase with the
proportion of conspicuous consumers. The conspicuous consumers benefit the firm except for a very small proportion of conspicuous
consumers. (4) When the price sensitivity of conspicuous consumers is at a medium level, we find an interesting result that the
quality investment efficiency and the conspicuousness degree play important and subtle roles in affecting the firm’s profit, product
quality and price. Specifically, when the quality investment efficiency is high (low) and the conspicuousness degree is low (high),
the profit increases (decreases) with the proportion of conspicuous consumers. But for those medium quality investment efficiency
and conspicuousness degree, the profit tends to decrease first and then increase with the proportion of conspicuous consumers. And
the conspicuous consumers’ impact on the product quality and price also shows a non-monotonic trend. (5) We find that the joint
decisions on quality and price emphasize strategic complementarity.
7.2. Managerial implications
Our research provides managerial insights and guidance for supply chain. In practice, considering the presence of conspicuous
consumers, when firms decide product quality and price, they should consider not only the conspicuousness degree, but also the
price-sensitivity and group size of conspicuous consumers. If conspicuous consumers’ price-sensitivity is low, the firm may set
higher quality and price as the proportion of conspicuous consumers increases. Such a phenomenon can be observed in reality that
most luxury firms maintain uniqueness in the high-end market just as Hermes that has always focused on its core product Birkin
bag (Zhou, 2021). Furthermore, when facing the consumers with relatively high price sensitivity, the firm needs to consider the
complex effects brought by its quality investment cost and consumers’ conspicuous psychology. For example, when the consumers’
conspicuousness degree and the quality investment cost are high, the firm can provide consumers with relatively low price and
quality products to satisfy their conspicuous psychology. This is in line with current practice such as Dior, Chanel, Gucci and Hermes
in which they start to open online flagship stores for perfumes, lipsticks and other cosmetics. Furthermore, we find that the firm
has incentive to adopt product line to segment the market when the conspicuousness degree is high. That is, the firm may provide
products of different qualities and prices to serve different consumers due to the high conspicuousness degree and different price-
sensitivity. For example, the luxury automaker Mercedes-Benz introduced its entry-level CLA class in 2013 to stretch its product
line downward for satisfying the consumers who have high price-sensitivity despite the existence of its high-end S-Class car line for
conspicuous consumers who have low price-sensitivity.
Despite the importance of the managerial insights for firm’s pricing and quality decisions with considering conspicuous
consumers, our paper also has a few limitations. We only consider one monopolist in the market. In the future, market competition
can be taken into account to further investigate the interaction effects of conspicuous consumption and market structure (monopoly
vs. competition). Furthermore, in reality, conspicuous consumers usually are endowed with different preferences for sales channels.
Therefore, it would be interesting to study the omnichannel strategy for the luxury supply chain with conspicuous consumers.
CRediT authorship contribution statement
Guowei Zhu: Conceptualization, Formal analysis, Funding acquisition, Writing – review & editing. Jianxiong Zhang: Methodol-
ogy, Project administration, Funding acquisition, Writing – review & editing. Enfeng Xing: Writing – original draft, Formal analysis,
Software, Visualization. Danke Han: Writing – review & editing.
17
Declaration of competing interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared
to influence the work reported in this paper.
Acknowledgments
This work was supported by the National Natural Science Foundation of China [grant numbers 71971152, 71871089].
Appendix. Proofs of the main results
Proof of Proposition 1. The firm maximizes the following objective function

1 2
max 𝜋 = 𝑝(𝐷1 + 𝐷2 ) − 𝑘𝑞 , (A.1)
𝑝,𝑞 2
2 2 3 +2𝑝2 (1+𝛾𝛼−𝛼)+2𝛼𝛽𝑝
where 𝐷1 and 𝐷2 are shown in Eqs. (3) and (5) respectively. 𝜕𝜕𝑝𝜋2 = − 2(1+𝛾𝛼−𝛼)
𝑞+𝛼𝛽
< 0 and 𝜕𝜕𝑞𝜋2 = − 𝑘(𝛼𝛽+𝑞) (𝛼𝛽+𝑞)3
< 0 show that
the objective function is globally concave. According to the first-order condition 𝜕𝜋∕𝜕𝑝 = 0, we get
𝑞
𝑝= . (A.2)
2(1 + 𝛾𝛼 − 𝛼)
Substituting (A.2) into (A.1), then according to the first-order condition 𝜕𝜋∕𝜕𝑞 = 0, we can get 𝑞 ∗ and 𝑝∗ as shown in Eqs. (7) and
(8) respectively. Then we can obtain the equilibrium profit and demands in Proposition 1. The proof is complete.
Proof of Corollary 1. By solving 𝐷∗ > 0 in Eq. (10), we can get 𝑘𝛽 < (2 𝑚 − 𝛾)((2 𝑚 − 𝛾)𝛼 + 𝑚)∕4𝑚3 . The proof is complete.
Proof of Corollary 2. Taking the first-order partial derivative of Eqs. (10) and (11) with respect to 𝑘, 𝛾, 𝛼 and 𝛽, we can obtain
𝜕𝐷1∗ 2𝛼𝛽(1 + 𝛾𝛼 − 𝛼)
= −√ < 0,
𝜕𝑘 16𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1
𝜕𝐷1∗ 2𝑘𝛼(1 + 𝛾𝛼 − 𝛼)
= −√ < 0,
𝜕𝛽 16𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1 (A.3)
𝜕𝐷2∗ (1 − 𝛼)𝛼
= > 0,
𝜕𝛾 2(1 + 𝛾𝛼 − 𝛼)2
𝜕𝐷2 ∗
𝛾
= − 1 < 0.
𝜕𝛼 2(1 + 𝛾𝛼 − 𝛼)2
The proof is complete.
Proof of Corollary 3. Taking the first-order partial derivative of Eqs. (7)–(9) with respect to 𝛽, we can get
(√ )
𝜕𝑝∗ 𝛼 1 + 16𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) − 1
=− √ < 0,
𝜕𝛽 2(1 + 𝛾𝛼 − 𝛼) 1 + 16𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼)
(√ )
𝜕𝑞 ∗ 𝛼 1 + 16𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) − 1
(A.4)
=− √ < 0,
𝜕𝛽 1 + 16𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼)
( √ )
𝛼 5 + 8𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) − 3 16𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1
𝜕𝜋 ∗
=− .
𝜕𝛽 8(1 + 𝛾𝛼 − 𝛼)
√ √
Let 𝑡 = 8𝑘𝛼𝛽, 𝑔(𝑡) ≜ 5 + 𝑚𝑡 − 3 1 + 2𝑚𝑡 (Note that 𝑚 = 1 + 𝛾𝛼 − 𝛼 ∈ (0, 1)). We can obtain d𝑔(𝑡) = 𝑚 − 3𝑚∕ 2 𝑚𝑡 + 1 < 0 by virtue of
√ d𝑡
the assumption √𝑡 = 8𝑘𝛼𝛽 < 1. That is, 𝑔(𝑡) decreases monotonically, while 𝑔(1) = 5 + 𝑚 − 3 1 + 2𝑚 > 0. Thus, 𝑔(𝑡) > 0 always holds,
∗
i.e., 5 + 𝑚𝑡 − 3 1 + 2𝑚𝑡 > 0. Therefore, we can get 𝜕𝜋 𝜕𝛽
= −𝛼𝑔(𝑡)∕8(1 + 𝛾𝛼 − 𝛼) < 0. The proof is complete.
Proof of Proposition 2. Taking the first-order partial derivative of Eq. (9) with respect to 𝛼, we can obtain
√
𝜕𝜋 ∗ 16𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1(4𝑘𝛽(1 + 𝛾𝛼 − 𝛼)(2𝛼(𝛾 − 1) + 3) − 𝛾 + 1)
=
𝜕𝛼 32𝑘(1 + 𝛾𝛼 − 𝛼)3 (A.5)
𝛾 + 32𝑘2 𝛼𝛽 2 (1 + 𝛾𝛼 − 𝛼)3 + 20𝑘𝛽(1 + 𝛾𝛼 − 𝛼) − 1
− .
32𝑘(1 + 𝛾𝛼 − 𝛼)3
18
Table 3
The effects of 𝛼 on 𝜋.
Case 𝛾 𝑘𝛽 The effects on 𝜋
I 0 < 𝑘𝛽 ≤ 1−𝛾
4
+
1 1−𝛾
II 0<𝛾≤ 2
< 𝑘𝛽 < 2 − 2𝛾 −+
4
III 2 − 2𝛾 ≤ 𝑘𝛽 –
IV 0 < 𝑘𝛽 ≤ 1−𝛾
4
+
1 1−𝛾
V 2
<𝛾<1
4
< 𝑘𝛽 < 1−𝛾
4𝛾 3
−+
1−𝛾
VI 4𝛾 3
≤ 𝑘𝛽 −
Denote ℎ(𝛼) ≜ 𝜕𝜋 ∗ ∕𝜕𝛼. Setting ℎ(𝛼) = 0, we can get

√
𝑘𝛽 + 2𝑘𝛽𝛾 + (𝑘𝛽)2 − 2𝑘𝛽
𝛼1∗ = ,
2𝛽(1 − 𝛾)𝑘
√
𝑘𝛽 − 2𝑘𝛽𝛾 + (𝑘𝛽)2 − 2𝑘𝛽
𝛼2∗ = ,
2𝛽(1 − 𝛾)𝑘
√3
(A.6)
(𝑘𝛽)2 (1 − 𝛾 7 + 7𝛾 6 − 21𝛾 5 + 35𝛾 4 − 35𝛾 3 + 21𝛾 2 − 7𝛾)
𝛼̃ = ( )
22∕3 𝑘𝛽 𝛾 3 − 3𝛾 2 + 3𝛾 − 1
𝛾 2 − 2𝛾 + 1
− .
𝛾3 − 3𝛾 2 + 3𝛾 − 1
There are two cases. Case 1: When 𝛼1∗ , 𝛼2∗ take real root solutions, that means 2𝑘𝛽𝛾 + (𝑘𝛽)2 − 2𝑘𝛽 ≥ 0. At this time, the equation
ℎ(𝛼) = 0 has three real roots, i.e., 𝛼1∗ , 𝛼2∗ , 𝛼.
̃ Case 2: When 2𝑘𝛽𝛾 + (𝑘𝛽)2 − 2𝑘𝛽 < 0, there is only one real root (𝛼) ̃ of the equation
ℎ(𝛼) = 0 at this time. Specifically, the analysis is as follows.
Case 1: When 2𝑘𝛽𝛾 + (𝑘𝛽)2 − 2𝑘𝛽 ≥ 0, i.e., 𝑘𝛽 ≥ 2 − 2𝛾, we can get 𝛼1∗ > 𝛼̃ > 𝛼2∗ and 𝛼1∗ ∈ ( 12 , ∞), 𝛼̃ ∈ ( 12 , ∞), 𝛼2∗ ∈ (0, ∞). Now
we consider the following scenarios. (𝑎) ∶ When 𝛼2∗ ≥ 1, 𝛼̃ > 1, 𝛼1∗ > 1, i.e., 21 < 𝛾 < 1 and 2 − 2𝛾 ≤ 𝑘𝛽 ≤ 2𝛾 1
, we can find that
1 1−𝛾
ℎ(𝛼) < 0. (𝑏) ∶ When 0 < 𝛼2∗ < 1, 𝛼̃ ≥ 1, 𝛼1∗ > 1, i.e., 0 < 𝛾 < 2
and 𝑘𝛽 ≥ 4𝛾 3
, or 12 < 𝛾 < 1 and 𝑘𝛽 > 1
2𝛾
, we can easily show that
1−𝛾
ℎ(𝛼) < 0. (𝑐) ∶ When 0 < 𝛼2∗ < 1, 12 < 𝛼̃ < 1, 𝛼1∗ ≥ 1, i.e., 0 < 𝛾 < 1
2
and 1
2𝛾
≤ 𝑘𝛽 < 4𝛾 3
, we can show that ℎ(𝛼) < 0. (𝑑) ∶ When
1 1
0 < 𝛼2∗ < 1, 2
< 𝛼̃ < 1, 2
< 𝛼1∗ < 1, i.e., 0 < 𝛾 < 21 and 2 − 2𝛾 < 𝑘𝛽 ≤ 1
2𝛾
, we can also find that ℎ(𝛼) < 0.
Case 2: When 0 < 𝑘𝛽 < 2 − 2𝛾, we consider the following scenarios. (𝑒) ∶ When 0 < 𝛼̃ < 1, i.e., 0 < 𝛾 ≤ 21 and 1−𝛾
4
< 𝑘𝛽 < 2 − 2𝛾,
or < 𝛾 < 1 and 1−𝛾
1
2 4
< 𝑘𝛽 < 1−𝛾
4𝛾 3
, we can show that ℎ(𝛼) < 0 if 0 < 𝛼 < 𝛼,
̃ and ℎ(𝛼) > 0 if 𝛼
̃ < 𝛼 < 1. (𝑓 ) ∶ When 𝛼
̃ ≤ 0, i.e., 0 < 𝛾 < 1
and 0 < 𝑘𝛽 ≤ 1−𝛾
4
, we can find that ℎ(𝛼) > 0. (𝑔) ∶ When 𝛼̃ ≥ 1, i.e., 12 < 𝛾 < 1 and 1−𝛾
4𝛾 3
≤ 𝑘𝛽 < 2 − 2𝛾, we can find that ℎ(𝛼) < 0.
Thus, combining the above seven scenarios, we can get the following results as shown in Table 3. Among them, ‘‘+ ’’ (or ‘‘–’’)
means that the firm’s profit increases (or decreases) with 𝛼, ‘‘−+’’ means that the firm’s profit decreases first and then increases
with 𝛼.
Proof of Corollary 4. Taking the first-order derivative of Eqs. (7)–(9) with respect to 𝛼 and 𝛽 respectively when 𝛾 = 1, we can
obtain that
𝜕𝑝∗ 1 1
= 𝛽(−1 + √ ) < 0,
𝜕𝛼 2 1 + 16𝑘𝛼𝛽
𝜕𝑞 ∗ 1
= 𝛽(−1 + √ ) < 0,
𝜕𝛼 1 + 16𝑘𝛼𝛽
𝜕𝑝∗ 1 1
= 𝛼(−1 + √ ) < 0,
𝜕𝛽 2 1 + 16𝑘𝛼𝛽
(A.7)
𝜕𝑞 ∗ 1
= 𝛼(−1 + √ ) < 0,
𝜕𝛽 1 + 16𝑘𝛼𝛽
√
𝜕𝜋 ∗ 𝛽(5 + 8𝑘𝛼𝛽 − 3 1 + 16𝑘𝛼𝛽)
=− ,
𝜕𝛼 8
√
𝜕𝜋 ∗ 𝛼(5 + 8𝑘𝛼𝛽 − 3 1 + 16𝑘𝛼𝛽)
=− .
𝜕𝛽 8
√
Similar to the proof of Corollary 3, we can also figure out that 5+8𝑘𝛼𝛽 −3 1 + 16𝑘𝛼𝛽 > 0. Thus, we can get 𝜕 𝜋∕𝜕𝛼
̄ < 0, 𝜕 𝜋∕𝜕𝛽
̄ < 0.
Proof of Proposition 3. Applying backward induction, for a given 𝑞 and 𝜂, we first consider the manufacturer’s optimal strategy
𝜕𝜋
for wholesale price 𝑤. According to the first-order condition 𝜕𝑤𝑚 = −𝜂+𝑞−2𝑤
𝑞+𝛼𝛽
= 0, we can get 𝑤 = 𝑞−𝜂
2
. Then, substituting 𝑤 into the
19
𝜕𝜋𝑟 −2𝜂+𝑞
profit function of the retailer, by taking the first-order condition of 𝜋𝑟 with respect to 𝜂, that is, 𝜕𝜂
= 2(𝑞+𝛼𝛽)
= 0, we can get 𝜂 = 2𝑞 .
( )
𝜕𝜋𝑚 𝑞 𝑞−16𝑘𝑞 2 −32𝑘𝑞𝛼𝛽+2𝛼𝛽(1−8𝑘𝛼𝛽)
Finally, the manufacturer decides the product quality 𝑞. By taking the first-order condition = =
𝜕𝑞 16(𝑞+𝛼𝛽)2
0, we can obtain the equilibrium strategies 𝑞, ̂ 𝑝̂ as shown in Eqs. (20)–(22) respectively. Furthermore, substituting the
̂ 𝜂,
̂ 𝑤,
equilibrium strategies into the demand functions and profit functions, we can get the equilibrium solutions 𝐷̂ 1 , 𝐷̂ 2 , 𝜋̂ 𝑟 , 𝜋̂ 𝑚 as shown
in Eqs. (23)–(26) respectively. The proof is complete.
4𝛼 2 (𝛾−1)+(3−2𝛾)𝛼+1
Proof of Corollary 5. By solving 𝐷̂ 1 > 0 in Eq. (20), we can get 𝑘𝛽 < . The proof is complete.
16(1+𝛼(𝛾−1))3
Proof of Corollary 6. Taking the first-order partial derivative of the equilibrium product quality, retail price and the profits of the
retailer and the manufacturer with respect to 𝛽 respectively, we can obtain
( √ )
𝜕 𝑞̂ 𝑘𝛼(1 + 𝛾𝛼 − 𝛼) 1 − 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1
= √ < 0,
𝜕𝛽 𝑘(1 + 𝛾𝛼 − 𝛼)2 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1
( √ )
𝜕 𝑝̂ 3𝑘𝛼(1 + 𝛾𝛼 − 𝛼) 1 − 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1
= √ < 0,
𝜕𝛽 4𝑘(1 + 𝛾𝛼 − 𝛼)2 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1 (A.8)
√
𝜕 𝜋̂ 𝑟 𝛼(96𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) − 5 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1 + 3)
= √ ,
𝜕𝛽 16(1 + 𝛾𝛼 − 𝛼) 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1
√
𝜕 𝜋̂ 𝑚 𝛼(−32𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 3 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1 − 5)
= .
𝜕𝛽 32(1 + 𝛾𝛼 − 𝛼)
√
Similar to the proof√of Corollary 3, we can also figure out that 96𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) − 5 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1 + 3 < 0 and
𝜕 𝜋̂
−32𝛼𝛽𝑘(1 + 𝛾𝛼 − 𝛼) + 3 64𝑘𝛼𝛽(1 + 𝛾𝛼 − 𝛼) + 1 − 5 < 0 always hold by virtue of the assumption 0 < 8𝑘𝛼𝛽 < 1. Thus 𝜕𝛽𝑟 < 0 and
𝜕 𝜋̂ 𝑚
𝜕𝛽
< 0 always hold. The proof is complete.
Proof of Corollary 7. Taking the first-order partial derivative of Eqs. (30)–(32) with respect to 𝛽, we can get
√
𝜕 𝑞̃ 𝛼( 𝛿 − 𝑛) ̃
= < 0,
𝜕𝛽 𝑛̃
√
𝜕 𝑝̃ 𝛿𝛼( 𝛿 − 𝑛) ̃
= < 0, (A.9)
𝜕𝛽 2𝑚̃ 𝑛̃
( √ )
𝛼 5𝛿 + 8𝑘𝛼𝛽 𝑚̃ − 3 𝛿 𝑛̃
𝜕 𝜋̃
= .
𝜕𝛽 8𝑚̃
𝜕 𝜋̃
Similar to the proof of Corollary 3, we can prove that 𝜕𝛽
< 0. The proof is complete.
Proof of Proposition 5. The firm maximizes the following objective function

1 2
max 𝜋 = (𝑝 − 𝑘𝑞 )(𝐷1 + 𝐷2 ), (A.10)
𝑝,𝑞 2
where 𝐷1 and 𝐷2 are shown in Eqs. (3) and (5) respectively. According to the first-order condition 𝜕𝜋∕𝜕𝑝 = 0, we get
( )
1 2
𝑝= 𝑞 + 𝑘𝑞 . (A.11)
4 𝛼(𝛾 − 1) + 1
Substituting (A.11) into (A.10), then according to the first-order condition 𝜕𝜋∕𝜕𝑞 = 0, we can get 𝑞̄ and 𝑝̄ as shown in Eqs. (35) and
(36) respectively. Then we can obtain the equilibrium profit and demands in Proposition 5. The proof is complete.
Proof of Corollary 8. Taking the first-order partial derivative of Eq. (37) with respect to 𝛽, we can get
𝜕 𝜋̄ ̄
𝛼(5 − 4𝑛̄ + 4𝑘𝑚𝛼𝛽(4 ̄
+ 2𝑘𝑚𝛼𝛽 − 𝑛))
̄
=− (A.12)
𝜕𝛽 9𝑚
𝜕 𝜋̄
Similar to the proof of Corollary 3, we can also prove that 𝜕𝛽
< 0, thus it is omitted here. The proof is complete.
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Transportation Research Part E 165 (2022) 102857

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Transportation Research Part E

Pricing and quality decisions with conspicuous consumers

ARTICLE INFO ABSTRACT

4. Pricing and quality decisions

i.e., 𝑞 ∗ , 𝑝∗ , 𝐷1∗ , 𝐷2∗ , 𝜋 ∗ > 0.

Proposition 1. The equilibrium quality, price and profit are as follows

Proposition 2. The effects of 𝛼 on the firm’s profit 𝜋 are as follows:

Fig. 2. The effects of 𝛼 on 𝑞.

Fig. 3. The effects of 𝛼 on 𝑝.

Fig. 4. The effects of 𝛼 on 𝐷1 and 𝐷2 .

Fig. 5. The effects of 𝛼 on 𝜋 with 𝛾 = 0.8.

6.1. Supply chain environment

6.2. Heterogeneous quality sensitivity

Fig. 6. The effects of 𝛼 on 𝑝, 𝑞.

Fig. 7. The effects of 𝛼 on 𝜋𝑟 , 𝜋𝑚 .

Fig. 8. The effect of 𝛼 on SE with 𝑘 = 0.2, 𝛽 = 0.5, 𝛾 = 0.3.

Fig. 9. The effects of 𝛼 on 𝜋 when 𝛿 = 0.4.

6.3. A positive marginal production cost

Fig. 10. The effects of 𝛼 on 𝜋 when 𝛿 = 0.7.

Corollary 8. The firm’s profit decreases with the conspicuousness degree.

6.4. Product line setting

𝑈1 = 𝜃𝑞𝑗 − 𝛾𝑝𝑗 − 𝛽𝐷𝑗 , (40)

𝑈2 = 𝜃𝑞𝑗 − 𝑝𝑗 , 𝑗 ∈ {𝐻, 𝐿}. (41)

Fig. 11. The effects of 𝛼 on 𝜋.

𝐷𝐻 = 𝛼(1 − 𝜃1𝐻 ) + (1 − 𝛼)(1 − 𝜃2𝐻 ), (42)

𝐷𝐿 = 𝛼(𝜃1𝐻 − 𝜃1𝐿 ) + (1 − 𝛼)(𝜃2𝐻 − 𝜃2𝐿 ). (43)

The profit function of the firm is

7. Conclusion and managerial implications

7.2. Managerial implications

CRediT authorship contribution statement

Declaration of competing interest

Appendix. Proofs of the main results

Proof of Proposition 1. The firm maximizes the following objective function

Denote ℎ(𝛼) ≜ 𝜕𝜋 ∗ ∕𝜕𝛼. Setting ℎ(𝛼) = 0, we can get

Proof of Proposition 5. The firm maximizes the following objective function

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