Questionable Luxury Taxes: Results from a Mating Game

This contribution provides a game theoretical derivation of market demand as a function of the level and distribution of income in the considered economy: if (i) the price is low, everyone buys the good; if (ii ) the price is high, only the rich buy the good (a status good in a narrow sense). If (iii) the price is located in very high or in middle range, demand collapses. With this, we explain the critical price from which a status good acts as a distinctive signal. In addition, this approach shows the potential welfare-improving impact of conspicuous consumption. Taking these results into account, recommendations by numerous economists to prevent the welfare losses of conspicuous consumption by introducing a luxury tax are highly questionable.