Who wants a ‘Vodka ALDI’?

How much of consumer spending is driven by our identity and the need to signal it to others?  And where exactly does our identity come from?

The more I think about it, the more I feel that identity – the projection of the person we desire to be – is a primary driver behind all consumption decision.  Economists explain spending behaviour with utility theory, but rarely consider what exactly utility is, where it comes from, or how we know in advance our utility from new products.

Economists are slowly embracing signalling as an explanation for behaviour that is more descriptive than basic utility theory. George Ackerlof is leading the charge.  He:

provides a framework for incorporating social identities into standard economics models, expanding the standard utility function to include both pecuniary payoffs and identity utility.

This comprehensive website based on Ackerlof’s book provides plenty of background reading.

Mainstream economics began to grasp signalling when analysing job-seekers pursuit of qualifications, and employer considerations.  Typically qualifications are not desired for the benefit of learning a skill, but to signal a level of competence to a potential employer in a competitive job market.

So why would people not signal their competence, ambition, compassion, adventurous spirit, environmental awareness or other personality trait through consumption behaviour? Marketers know, for example, that most people who buy premium brands of outdoor equipment rarely use them in the extreme environments for which they are designed.  Paying the price premium for the ‘quality brand’ projects a signal about your character – that you have a passion for the outdoors, so much so, that when it comes to your equipment you won’t compromise.

At a more primal level, and the one to which marketers most commonly appeal, signalling involves appealing to the opposite sex.  Products are intentionally associated with desirable character traits, and each purchaser is subconsciously buying a signal of this trait for others to observe.

I suggest that this type of consumer behaviour is best explained by referring to Maslow’s hierarchy of needs. For example, our need for belonging and esteem can be satisfied by purchasing products that are associated with particular social groups, regardless of their cost effectiveness for their intended practical function.  Once our basic needs are met, what other purpose does consumption serve but to fulfil these higher level desires?

Broadening our understanding of utility help to explain the somewhat irrational outcomes we observe in reality, but not in economic theory.  When someone pays $30,000 more for a European version of an almost identical car, while there may be some improvement in quality, for the objective driver the value of this quality gain is not nearly $20,000.

But, it makes sense when you think about signalling.  The signal that the European car sends about you cannot be bought elsewhere for anything near the $20,000 premium you paid.  You would have to deck out the house and family in the most designer furniture and clothes to send a signal that you are the type of person who goes for quality or nothing, no matter what the cost.

And that’s how I see more and more consumer behaviour as we become wealthier. If utility theory worked, marketing departments would not exist.  Nor would the upward sloping demand curves observed with Veblen goods.

Yes, Thorstein Veblen explained economic behaviour in terms of signalling status (conspicuous consumption) during the boom times of the 1890s.  Many great inventions were first hitting the marketplace including bicycles and petrol-powered cars, and the nouveau riche class was emerging with a way of spend money that needed explanation.

I would argue that during all periods of rapid economic progress this type of consumption behaviour begins to dominate over classically rational utility.

A recent example close to home demonstrates this point. My uncle runs a business selling his wares at a market.  After reading some business improvement books he put his prices up.  An economist might offer this advice is they believed the demand was relatively inelastic.  But in a market with competition on all sides, it seemed unlikely.  The result was, rather than reducing sales, the higher price increased sales.  The new higher price sent the signal of quality the buyers were looking for.

The pattern is clear to see almost everywhere. You might not believe it, but I’m the type of strange person who likes to buy no brand equivalent products and conduct blind taste tests.  At one party I did Red Bull and the ALDI generic version.  The vast majority preferred the ALDI brand (about 80%), yet it was only a quarter of the price.  But who would want to be seen drinking a ‘Vodka ALDI’? People drink  a ‘Vodka Red Bull’ because it signals their ‘extremeness’ – as Red Bull’s marketing department is only too eager to point out.

It seems clear that if economics is going to be a more useful took for analysing consumer behaviour and business responses, it needs to follow Ackerlof’s lead and look to where utility actually comes from, and whether indeed utility theory is even necessary to explain consumer behaviour.

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Comments

  1. I am like you Rumple – one of the utility buyers. I am convinced a double blind taste test on a majority of homebrand items would show them to be equivalent. I find modern marketing very, very funny. Especially beauty products

    • Dumb_Non_Economist

      Where have economists been living, it’s basic psychology. Doll a product up, get a celeb to endorse it and watch the money roll in! Okay a bit over the top, but pretty close to the truth.

      With beauty products it annoys me that they only stopped them marketing with outright lies to now only bullshitting!

    • Buying home brand products can be signalling too: ‘I’m too smart to fall for those marketing tricks!’

  2. If utility theory worked, marketing departments would not exist.

    Almost verbatim to what I have said to many economists over the years i.e. if economics worked marketing would not exist.

    What used to astonish me was that economist in one department would teach theories about what people do without ever having walked over to the marketing or psychology departments to see if these theories had any empirical validity (maybe they didn’t want the truth because they can’t handle the truth?).

    BTW “no brand” products are often made by branded companies with excess capacity, i.e. the contents are identical.

    • This. At the large-ish canned food company I once worked for the only difference between the generic and the branded product was the label. Profit margin was the same due to no sales & marketing budget on the generic.

  3. Once you start questioning marginal utility, mainstream economics start unravelling. Thats why its easier just to accept it, even if it is unrealistic.

    • that’s a bizarre statement.

      Science would have never progressed from witch doctory and alchemy with that attitude — but it kind of tells us where economics sits I suppose.

      • Economics made its bed 150 years ago, now it has to lie in it. Seriously though, questioning key assumptions would mean revising whole textbooks and upsetting egos. Nobody is going to do that.

      • I think the point is that if they don’t, it will become increasingly irrelevant and divorced from reality. The economic of flat-earthers, if you will.

  4. I guess there is no premium in showing-off that you are wise with your money.

    Consider this, a car that has clocked 10,000 ks on it is 5000 dollars less than one that has clocked 200ks . People are still ready to pay a 5000 dollar premium.

    • the 200K km is cheap maybe due it likely needing some expensive work in the near future.

      But I agree we like to show off. We are stupid Peacocks. “mmm, nice house!” “Great car mate”. All the girlez go for spectacular displays of earning potential.
      Well, that’s one factor anyway. Some other factors are important too.

  5. Consumerism meets narcissism meets aspirationalism. The people most likely to demonstrate this enormously wasteful tendency are the middle to lower income groups. The drink you refer to is a good example, where a ‘brand’ is cheap enough, even though vastly more expensive than the Aldi equivalent, for almost anyone to buy and display. Most of the huge ‘brands’ in this consumerist world produce trinkets and geegaws which the average aspirationalist can afford. In the age of the phone-zombie, that means a little white or silver toy that must/can be clutched at all times, even – no, especially – when staggering on to a tram, burdened with big, branded shopping bags. It also means a brand-identifier can have a t-shirt with ‘official’ Ferrari logo on it, even if the hippest think it’s naff while drinking their Red Bull.

    The herd instinct collides with the addiction to identity, ironically. It’s a certain nuance that companies must give their products in order to promote individualism and mass consumption at the same time.

    There are more slaves in the world than at any time in history, and many of them produce these commodities. Is this side of identity economics considered?

    It’s pertinent to ask ‘where exactly does our identity come from?’ Perhaps more so to ask where it’s going. Branding and commodification have reached the point where it seems unexceptional to hear of some minor celebrity’s own ‘brand’. We are consuming ourselves.

  6. Aldi is by far my favorite shop, only quality, no artificial colors and I enjoy so much not having to choose between 50 brands when i just want a bottle of tomato sauce, so relaxing.My wife is i love with their dermatological/hydrating creams Lacura.

    • Partly. There are many biases examined by behavioural economists, but identity and signalling – the formation of utility itself – is not quite mainstream. Behavioural economics is more about habitual biases which undermine rational utility theory, while Identity Economics is about expanding utility theory to be more descriptive of actual consumption choice.

      While I haven’t caught up on the latest literature, I expect these two ideas to merge into a new school of economic thought – which would have been essentially borrowed from other social science disciplines.

  7. Why do you think a “study” is released every 6 months that says Australians are the most tech savvy & take up new technology faster than the rest of the world. Not because it is true. Price snobbery is a fully recognised marketing technique. The art world exists due to it.

  8. then again some people are comfortable who they are and dont need to project a false image of who they are or want to be…

    so in effect what you have described is a ‘sceneo tax’

  9. +1 to this great post,cheers
    Love Macondo’s last sentence @8.30am..”We are consuming ourselves”
    I forecast a lot more depression and suicides in 10 years time when the me generation have to accept “that you cain’t always git wa u want” and they don’t want to bother “if you try you might just get what you need” (Rollin Stones)
    Yes I am the same about cheaper brands and it is exciting to get one up on the marketers..one can easily save $25 a week…a warning though..if the food is Made in China put it back on the shelf….

    • I keep the wife busy by making her buy non-processed foods and cooking from scratch. The problem is…many high quality frozen foods contain ingredients MADE from Chinese ingredients. If you don’t believe me, google “chinese artificial rice” or (blechh) meat made from feces..

      They have even less regard for our lives than they demonstrate for their own people.

  10. I wonder if information asymmetry has something to do with it? When faced with a choice between a reputable, relatively expensive product and an unknown, cheaper product, a risk averse person might pay the premium for a product they know is reasonably good, rather than save a few dollars and get something that might be better, the same, or useless.