Relative consumption with multiple reference points under uncertainty

Kovács, Kármen (2020) Relative consumption with multiple reference points under uncertainty. ECONOMICS AND SOCIOLOGY, 13 (4). pp. 61-80. ISSN 2071-789X (print); 2306-3459 (online)

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Abstract

According to the behavioural economic perspective, an individual’s consumer utility derives not only from his absolute consumption but also how much he consumes relative to others, that is, relative consumption matters. The purpose of this paper is to study relative consumption by focusing on social comparison, multiple reference points, and uncertainty related to the expectations about others’ future consumption. The model presented may offer a new framework for the investigation of relative consumption. The purpose of the model is to describe the potential change of an individual’s consumer utility derived from relative consumption when his social reference points’ future absolute consumption level is uncertain. When an individual wants to improve or at least sustain his relative consumption in the future, he has to take into account and estimate the future absolute consumption levels of the persons belonging to his reference group. However, the neighbours’ future consumption is usually uncertain. We illustrate the relations with some cases. Finally, we conclude that higher absolute consumption level not necessarily provides higher consumer utility when positional concerns matter. It means at the same time that neighbours’ uncertain future absolute consumption level can result in both higher and lower social standing for an individual.

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