Conspicuous Consumption in China - Research Paper Example

Conspicuous Consumption in china This study aimed at examining what has precipitated a surge in conspicuous consumption among Chinese, in spite of the recent global economic regression. China’s consumers sector shows a constant growth as well as increased share in global sales for some the world’s largest luxury brands. In order to explore what has led to conspicuous consumption in china, the study analyzed factors that affect purchases of luxury products. The study examined factors like disposable income, tastes, and preferences of Chinese consumers to establish how they influenced the need for success in advertisement through luxury products. Tastes and preferences were the principal determinants for the purchase of lavish goods. Exceptionally luxurious products that maintained good quality where desired more. Income did not have a bearing on the decision to purchase luxurious goods, as many people were not fascinated by the price of goods. The Chinese middle class engage in conspicuous consumption so that they can maintain a high standing in the society. They are more westernized and stylish thus seeking to be more exceptional than the other Chinese. Introduction Recently, China has witnessed a steady annual growth rate of 10%. This rise has propelled China to an economic powerhouse in less than three decades. Because of China’s rise, approximately 500 million people were raised above the poverty line (Frith, 2010). The middle class did not only resort to unfeasible high-end lifestyles but also changed from a saving to a spending culture. Conspicuous consumption is more pronounced in China because it has a relatively high number of young millionaires. Chinese millionaires lie at the age of 39 years being younger than their international peers are. These millionaires consume luxury goods in order to maintain their professional relationships and high social ranks (Dorothea, M2011). Chinese people are known for bragging in society through ownership of luxurious commodities. They greatly value success, wealth, and social status through displaying expensive watches, jewelry and cars to gain respect from the commoners. Chinese ‘little emperors’ are also an important factor contributing to conspicuous consumption of luxurious goods in China. These young consumers are a result of the one child policy that was adopted in the 1970’s. Those born during that period are without siblings therefore being the focus of attention of parents (Dorothea, M2011). They were brought up as spoilt children who got what they wanted, when they wanted it. It is for this reason most college students in own iPhones or iPads which exceed their purchasing power. Because they are mollycoddled, many luxurious companies target them. As they are pampered, they look for the best luxury goods which are strong social symbols in china. 25 – 30 year old Chinese consumer luxury products therefore labeled as the primary consumers by the International association for luxury goods (Frith, 2010). Psychological factors have a bearing on luxury consumption in China. Chinese consumers stereotype countries by their specialty for instance they stereotype Germany for production of poor quality cars. Chinese recognize France for its luxury goods. For instance, being a French company, Ricard company imports whisky in China, which is more, preferred despite China’s production of its own brand. Over the past few years, whisky sale has gone up by 30% annually to US Dollar 115 million in 2006, putting China among the top ten countries with the highest whisky sales. This serves to highlight the dynamic nature of Chinese luxury brands market (Dorothea, 2011). In order to establishing the existing level of consumerism in China, this study seeks to fulfill the following objectives. Research Objectives The amount of consumption in an economy is important because it informs the amount of economic output in terms of production. Conspicuous consumption in China has been increasing proportionately with China’s economic growth. This has given rise to the number of millionaires in the country who value living posh lifestyles whose core characteristic is consumption of luxury goods. This study aims at establishing factors that drive conspicuous consumption in China. Specifically, the study seeks to achieve the following objectives. To: 1) Determine the relationship between conspicuous consumption and disposable in China. 2) Establish how tastes and preferences influence conspicuous consumption in China. 3) Investigate the impact of prestige on conspicuous consumption. 4) Establish the impact of conspicuous consumption on China’s economic growth Research Questions In order to achieve the above objectives, the study shall endeavor to answer the following questions: 1) Is China’s conspicuous consumption linked to the individual’s disposable income? 2) What is the connection between conspicuous consumption in China and the people’s prestige, tastes and preferences? 3) What is the impact of China’s conspicuous consumption on the country’s economic growth? Literature Review Conspicuous consumption was used (although narrowly) to describe the upper social class that used their wealth as a way of showing off their social status and prestige during the second industrial revolution. Such people were mainly the then emerging rich social class of the 19th century. It is one of the ways through which consumers impress others, show off wealth, gain self-esteem, as well as improve social their social status (Veblen, 1918). Veblen used the phrase to describe consumer behavior whereby people used expensive commodities not to satisfy their wants but rather to display their wealth and income. In economics, there are two kinds of utilities that are derived from consuming goods and services. One type of utility is utilitarian in nature whereby consumers derive utility from the use of a commodity while actually satisfying their needs. The second type of utility is conspicuous consumption. This is simply the satisfaction that consumers get when seen consuming a particular good or service (Basmann, Molina, & Slottje, 1988). Generally, these two kinds of utility battle with each other alter consumers’ buying decisions with price. According to Veblen, direct consumption that enhanced life and well-being is primary utility. Veblen believed that consumption of goods and services made up secondary utility as a way of confirmation of consumer’s purchasing power. Consumption that is driven by secondary utility and solely not a result of satisfying well-being is what Veblen branded “conspicuous consumption” or “waste” (Veblen 1899). Secondary utility is a characteristic of all income and social classes from the rich to the poor and according to Veblen, this is what motivates conspicuous consumption. Consumption patterns of the less affluent are determined by those of the more affluent. The less affluent usually imitate the more affluent. Individuals normally engage in conspicuous consumption in order to create a notion that they are wealthy. They make use conspicuous luxurious products to impress their peers so that they can be seen as wealthy (Coleman, 1983). Because of its social linkages, secondary utility has far more reaching impacts than primary utility in economic growth and development. In the South Korean population, research indicates that teenagers have a considerable tendency to favor conspicuous consumption (Kim, 1998). Kim (1998) argues that there has been higher growth in conspicuous consumption in China, in the recent past, than in Korea. This is despite the fact that Chinese consumers are more price-conscious. However, conspicuous consumption has also been witnessed among unusual territories. For instance, it has been observed among consumers with low purchasing power (Frank, 1999). This global drift is particularly observed among emerging economies such as China, South Africa, India, and Brazil where average luxury growth rate is 20% to 35% (Krauss, 2008). Previous studies have explained conspicuous consumption in the context of social classes in societies. There is little research that explains why conspicuous consumption is more prevalent among some economies than in others are. It is possible that there are factors that cause differences in conspicuous consumption among societies. Such factors, however, need to be established through empirical research. This study focused on establishing why conspicuous consumption is prevalent in the China. Methodology This study uses mixed research methods whereby both qualitative and quantitative techniques are utilized. Quantitative methods are significant in handling numerical calculations of research variables while qualitative techniques are crucial in elucidating the existing correlations from the collected numerical data. This makes the mixed research approach reliable and appropriate for the study. Data collection is done using well-structured questionnaires and is composed of both primary and secondary data. Qualitative approach is useful in this because participants have varying perceptions. The study set out to observe individual preferences and tastes which cannot be measured ordinarily through quantitative means. A closed structured questionnaire was used in data collection so that there could be uniformity in the data so collected. Qualitative data collected by the questionnaires was coded into quantitative data followed by a careful analysis to examine the impact of independent variables on the dependent variables. The dependent variable measures how use of leisure is significant to the respondents. The respondents were required to indicate how crucial leisure consumption was to them by selecting from a given predetermined range. The independent variables measure their incomes, tastes, and preferences. To measure tastes and preference respondents were asked whether quality, uniqueness, and friends influenced their consumption. Product quality and uniqueness have a positive influence on individuals’ frequency of purchasing luxury products. Consumers are more likely to buy a luxury product if they consider it to be not only unique but also high quality. On the contrary, prices, annual income, and friends do not have a significant influence on individuals’ frequency of purchasing luxury goods. Thus, a positive correlation is established between how often people buy luxurious products on one hand and the uniqueness and quality of a product on the other hand. When consumers consider luxurious goods to be unique and of high quality, they will be more likely to purchase them because such goods set them apart from their peers. Having unique products improves their social standing and confidence and consequently, a sense of fulfillment. Sophisticated consumers will seek to be distinctive rather than using luxury to show off their wealth. Models Modeling Trade-offs Consumers are often faced with many types of choices in their life, and it is often difficult to make a decision because of many different factors of demand. In general, consumer choice displays an individual’s preferences or tastes for a good and the constraints they face. As the economists define, consumer choice problem involves a maximizing a consumer’s utility, subject to a budget constraint so that some consumers with strong rational knowledge always make the choices that are best for them. However, most people are only relatively rational to make mistakes easily for them Dorothea, 2011). In regards to this research paper, conspicuous consumption is an extensive discussion in the field of economics. The one of the most important issues considered by economists is the decision of consuming conspicuous goods, that is, why consumers would rather spend a lot of money on conspicuous goods than save money for another things. Although this decision may be affected by lots of factors, it still belongs to individual choice so that each individual needs to make their own decision on the premise of their own constraints. However, what kind of goods is classified as conspicuous consumption goods? As Veblen first introduced this term, people call some goods as“Veblen goods” which includes some type of luxury goods, such as designer handbags, fancy cars, jewelry. Such kind of goods are special since decreasing their prices decreases peoples preference for buying them because they are no longer perceived as exclusive or high-status products. Snob value is defined that the value of owning something that is very expensive or rare, for the supposed status one gains by owning it. Thus, the purpose of individual consuming conspicuous goods is to show their achievement and position in society through owning expensive commodities. Assume that individual i has a direct utility function U that depends upon consumption on conspicuous goods, C and leisure, l : Ui=Ui(c, l), and the budget constraint for consumption is : C = wN + π - T, where w is the market real wage rate; N is the time spend on work; π is dividend income; and T is tax. Graph 2 represents the individual utility maximization problem. From Graph 2, the consumer chooses the consumption bundle that is on his or her highest indifference curve, while satisfying his or her budget constraint. As graph shows, the x-axis represents the leisure and y-axis represents the consumption. The indifference curve is convex since the consumer has a preference for diversity in his or her consumption bundle, and it slopes downward that satisfies the property of indifference curve “more is preferred to less”. The slope of budget constraint is the marginal rate of substitution of leisure for consumption on conspicuous goods, which equals the real market wage rate. Data Analysis Data analysis entailed both qualitative and quantitative analysis to provide comprehensive information for hypothesis testing. Table 1 in the appendix shows the means and standard deviations of the nine variables that were used in the study. Variables with means not greater than 2.5 indicate that the respondents agreed to have been influenced by the variables on their decision to purchase luxurious products while those with means above 2.5 shows that the variables did not influence the respondents’ decision to purchase luxurious product. For instance, the purpose of being oneself can be seen (from table 1) to have a positive mean of 2.01 with a standard error of 0.0165. This implies that the respondents agreed that they purchase luxurious products for the reason of being themselves. Desire to be rich, on the other hand, had a mean of 3.74 with a standard error of 0.409. This indicates that respondents were not influenced by the desire to be rich in their decisions to purchasing luxurious products. It also implies that factors such as friends’ expectations, gender, as well as ability to elicit happiness affected consumers’ decision to purchase luxury products positively. However, other reasons like social class, incomes, and desire to be successful had negative influence on their decisions to purchase luxurious commodities. Table 2: shows regression analysis between the dependent and the independent variables. From Table 2, it is clear that gender and income have a negative effect on the desire for participants to express success through conspicuous consumption. Factors such as age, desire to be rich, desire to be successful, and being oneself have a positive effect on the participant’s decision to express their success through conspicuous consumption. This supports previous theories that Chinese tend to express their success through conspicuous consumption of luxurious commodities. Increase in age and social class results to an increase in the desire by participants to consume luxurious products. The study employed the use analysis of variance (ANOVA) to gauge independence between the dependent and independent variables. The hypothesis states that there exists a positive correlation between quality and uniqueness of luxurious product and its demand. The hypothesis is tested against an alternative hypothesis that there is no correlation between the frequency of purchase and quality and uniqueness of luxurious products. The hypothesis is tested at 95% confidence level. The calculated F statistic is 1.52 while the computed F statistic at 4 degrees of freedom is 0.1940 as indicated in table 1 in the appendix. F calculated is greater than F computed. This shows that there is dependence between desires to advertise and the income status of an individual. Results This study interviewed 2240 respondents by giving them self-administered questionnaires. Out of the 2240 questionnaires, 2015 were returned. This shows a 90% response rate that is adequate for the study. Out of the 2015 returned questionnaires, 55% were female while 45% were male. The finding shows that majority of the respondents (48%) agreed that leisure consumption was important for them. Out of those agreeing that leisure consumption important, 47.5% were male while 52.5% were female as shown in Figure 1. Figure 1: Leisure Consumption composition by gender Figure 2: How important is luxury consumption? The researcher asked the respondents whether it was important for them to consume leisure or not. 52% of the respondents felt that it was important while 48% of them did not see the need for leisure consumption. 8% of the respondents were undecided about consumption of leisure. Figure 3 below shows that three respondents felt that there was a strong need to live up to what their friends expect through conspicuous consumption. 75% of them showed that there was need to live up to the expectation of their friends through consumption of leisure. However, 25% of the respondents did not agree that they should live up to their friends’ expectations through conspicuous consumption. Figure 3: It is Important to live up to what friends expect? The respondents were asked a set of 10 questions about their expenditure on luxurious products. The results are shown in figure 4 below. 74% of the respondents agreed that they purchased luxurious goods because they preferred to show off their success through leisure/conspicuous consumption. On the other hand, 54% of the respondents agreed that, they bought luxurious products so that they could be seen as wealthy. From the results in figure 4 below, it is evident that showing off success and being happy with a luxurious product had the highest influence on the respondents’ decision to have conspicuous consumption. 74% of the respondents agreed that it was crucial for them to indulge in leisure consumption as a way of showing how successful they were. Perceiving oneself as unique and special was another factor leading to individuals engaging to conspicuous consumption. From figure 4 below, 65% of the respondents indulge in conspicuous consumption so that they could be themselves. Figure 4: Reasons for engaging in Conspicuous consumption Further analysis of data was done to check whether there was any dependence between annual incomes and advertising of success through purchase of luxury products. Table 5, in the appendices section, shows the tabulated data for the respondent’s decisions and their annual income. The table shows how individuals with differing annual incomes thought of advertising their wealth through conspicuous consumption. Figure 5: Annual Income on desire for conspicuous consumption The results indicate that majority of those who consume luxurious commodities are those whose annual incomes are below the fifth step. Figure 5 indicates respondents with annual incomes below fifth step have a higher desire for advertising their wealth through luxurious commodities. On the contrary, respondents with incomes above fifth step had less desire of showing their success through consuming luxurious products. From the fifth step, as shown in Figure 5, as individual income increases the desire to advertise his success through luxurious products declines. Therefore, the study reveals that income has negative influence on the desire for conspicuous consumption. Self-reward is the principal reason as to why most Chinese would buy branded luxury products. It is notable that the men purchase luxury goods primarily for social reasons. Women enjoy ownership of luxurious goods. Women in China have become more independent thus having high spending power. Majority of them seek to reward themselves with luxury goods. Conclusion The study aimed at determining whether there was any correlation between desire to show success, one’s income, and friends influence on consumers desire to show off their success through conspicuous consumption in China. The results indicated that friends did not influence purchasing behavior of individuals with regards to luxurious products, neither did the price. Factors such as quality and uniqueness had a positive influence on the consumers’ desire to advertise their wealth through conspicuous consumption. It is now an established fact that consumers prefer to use luxurious products that sets them apart from their friends and peers. As long as the product is unique, the price would not matter at all since they will be willing and are able to pay for it. The Chinese culture places great value on success and regards success highly. Showing off one’s wealth purchase of luxurious products is an accepted way of life in China. This has consequently contributed to the prevalence of conspicuous consumption among the Chinese. From the study, it is established that Chinese who earn less than the fifth step annually (table 5) contributed to consumption on luxurious products. This finding validates Veblen’s assertion that the less affluent emulate consumption patterns of the more affluent. This is done by indulging in conspicuous consumption to create a notion that they are also wealthy. The conclusions arising from this study are, however, subject to a number of limitations. For example, it is hard to establish the extent to which the results of this study can be applied to other countries. Moreover, the population studied was too small to make an accurate generalization about the Chinese population. Most importantly, different countries differ socially, economically, culturally and politically. This renders cross-border generalizations impossible. For instance, whereas the Chinese regard success highly and thus show off their wealth through luxurious products, other countries such as Canada may have a different way of showing their success. Another limitation is with regards to goods of ostentation whose demand increases with increase in price. Therefore, price may have an effect on the consumption off luxurious good contrary to what the results of the study indicate. The results of the study indicated that the Chinese did not purchase luxurious goods because of their prices rather because of their quality and uniqueness. Where price is considered as quality in luxurious product, a positive correlation could be established between the product and its price. Finally, there may be other ways to measure factors that contribute to conspicuous consumption of luxury goods rather than price, quality, and uniqueness of the products. The study might have omitted other variables that affect the factors examined by this study. If other factors other than those examined in this study could be included, the results could be much more accurate and more applicable across borders. A more comprehensive research should, therefore, be done to eliminate these limitations. References Basmann, R., Molina, D., Slottje, D. (1988). A note on measuring Veblen’s theory of conspicuous consumption. Review of Economics and Statistics, 70(3), 531-535. Dorothea, M. (2011). Consumerism and China’s One Child Policy – the second generation. Retrieved on 7 March 2014 from: http://history.appstate.edu/sites/history.appstate.edu/files/Dorothea%20Martin%20-%20Paper.pdf Frith, K. (2010). The rising dragon: Chinese consumerism. Retrieved on 7 March 2014 from: http://www.adjournal.nccu.edu.tw/pdf/025-1.pdf Coleman, R. 1983. The continuing significance of social class to marketing. Journal of Consumer Research 10 (3): 265–280. Eastman, J. K., R. E. Goldsmith, and L. R. Flynn. 1999. Status consumption in consumer behaviour: Scale development and validation. Journal of Marketing Theory and Practice 7 (3): 41–51. Frank, R. H. 1999. Luxury fever: Money and happiness in an era of excess. Princeton, NJ: Princeton University Press. Kim, J. (1998). Assessing the causal relationships among materialism. Consumer Interests Annual, 44, 155. Krauss, C. 2008. Worldwide luxury goods market growth projected to slow substantially by end of year and head into recession in 2009. Mason, R. (1999). The economics of conspicuous consumption: Theory and thought since 1700. Journal of Economics - Zeitschrift fur Nationalokonomie, 70(1), 95-98. Schiffman, L. G., and L. L. Kanuk. 2004. Consumer behavior. 9th ed. Englewood Cliffs, NJ: Prentice Hall. Veblen, T. B. 1918. The theory of the leisure class. New York: Viking Press. Appendices Table 1: Mean Estimations Mean Std. Err. [95% Conf. Interval] Happiness 2.014731 0.0214247 1.972696 2.056767 Be themselves 2.013865 0.0165349 1.981423 2.046307 Fit in with friends 2.180243 0.017436 2.146033 2.214452 Sign of wealth 3.742634 0.0409623 3.662265 3.823003 Sign of success 2.848354 0.0376536 2.774476 2.922231 Gender 1.498267 0.0147249 1.469376 1.527158 Age 42.95321 0.3894378 42.18912 43.71729 Employment 2.476603 0.0669943 2.345159 2.608047 Social class 3.605719 0.0257406 3.555216 3.656223 Incomes 4.110052 0.0549185 4.002301 4.217803 Table 2: Regression analysis Coef. Std. Err. T P > |t| [95% Conf. Interval] Happiness 0.0642495 0.0323019 1.99 0.047 0.0008701 0.1276288 Be themselves 0.0903029 0.0408356 2.21 0.027 0.0101796 0.1704262 Fit in with Friends 0.049197 0.0398825 1.23 0.218 -0.0290562 0.1274502 Sign of wealth 0.0085749 0.0163589 0.52 0.600 -0.0235227 0.0406725 Sign of Success 0.0258233 0.018358 1.41 0.160 -0.0101968 0.0618435 Gender -0.0669333 0.0449306 -1.49 0.137 -0.1550913 0.0212247 Age 0.0039624 0.0017217 2.30 0.022 0.0005842 0.0073406 Employment 0.0019509 0.0097811 0.20 0.842 -0.0172405 0.0211423 Social Class 0.0188465 0.0310758 0.61 0.544 -0.0421272 0.0798203 Income -0.0040054 0.0144196 -0.28 0.781 -0.0322981 0.0242873 Constants 1.742497 0.2188114 7.96 0.000 1.313168 2.171826 Source SS df MS No. of Obs = 1126 F(10, 1115) = 3.07 Prob > F = 0.0007 R-squared = 0.0268 Adj R-squared = 0.0180 Root MSE = 0.73805 Model 16.7047919 10 1.67047919 Residual 607.359151 1115 0.544716728 Total 624.063943 1125 0.554723505 Table 5: It is Important that I advertise my success by owning luxury products Step income Leisure consumption Very important Rather important Not very important Not at all important Total Lower step 18 57 77 14 166 Second step 20 72 88 5 185 Third step 30 117 125 15 287 Forth step 22 87 101 14 224 Fifth step 22 135 134 12 303 Sixth step 25 88 78 10 201 Seventh step 12 50 31 6 99 Eighth step 8 11 13 1 33 Ninth step 2 1 3 1 7 Upper step 0 1 0 0 1 Total 159 619 650 78 1506 Read More