In this episode of Lehigh University’s College of Business ilLUminate podcastOliver Yao and Mary Beth Deily discuss their research examining the willingness of consumers to pay for status signals in online luxury markets. The study they co-authored with Yue Yuan, a former Lehigh Business graduate student in economics, was recently published in the journal Production and Operations Management.

The study looked specifically at two Louis Vuitton handbags that were identical in quality, design style, and list price. The only significant difference was in the brand logos on each handbag. What was considered the “loud” logo had the LV initials printed over the entire handbag in the chessboard pattern of Louis Vuitton. It also had brighter trim and a brighter handle. The quiet version of the bag had the chessboard pattern, but with the name Louis Vuitton fully spelled out in very tiny letters in one small square of the bag. The handle and trim of the "quiet" handbag were dark.

To see the Louis Vuitton bags used in the research, watch a short video featuring Deily talking about the study.

The study compared transaction prices consumers paid for each of the two handbags from two popular online markets that sell pre-owned products.

Yao is the Associate Dean for Graduate Programs and holds the George N. Beckwith ’32 Professorship in Decision and Technology Analytics (DATA) in Lehigh's College of Business. His research interests are in the interdisciplinary fields of information systems and supply chain management. Deily is a professor of economics who does most of her work in the area of empirical industrial organization.

They spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation. Read the complete podcast transcript

Jack Croft: The idea of brand signaling is one that probably needs definition upfront. So if you could start with, both in general terms and then specifically as it applies to the luxury goods market, what is brand signaling?

Mary Beth Deily: We could think of brand signaling as using the brand of a product to send a signal to other consumers who may or may not have also purchased the product. In the case of luxury goods, the luxury brand sends a signal to other consumers specifically about the wealth and status of the owner of the product.

Oliver Yao: I would just want to add a little bit to what Mary Beth just said. We all understand what brands are. There are luxury brands, there are normal brands, you have Mercedes brands, you have Honda, you have Toyota, different level of brands and recognition. And also there's a signaling. When a firm is trying to market their products, they oftentimes have to think about, "How do I get our brand name out to our consumers?" I want to talk about the conventional wisdom over here. Then later on, when we'll talk about our results, we’re going to come back to revisit the conventional wisdom. The conventional wisdom is that firms almost always want very clear signaling to the consumers. They want to make sure when consumers see a product, they know which brand it is. And they want consumers to be clear on the brand, as clear as possible. That's conventional wisdom.

Croft: In your study, you mentioned previous research that delineated two groups of people interested in signaling status. One was called “patricians,” or I think what a lot of us used to refer to as “old money,” and the other was the “nouveau riche,” those who have acquired their wealth in more recent times. So what are the differences in the ways those two groups tend to signal status?

Deily: We use the phrase nouveau riche to describe people that want to send an easily recognizable signal to the general public about their status, their presumably newly acquired status. Therefore, for this group, it's important that the goods be marked in such a way that the general public can recognize the item as produced by a well-known luxury goods producer. The term patrician we used to describe people that belong to a group that is knowledgeable about the luxury products. And while they appreciate the quality of the luxury good, they’re not that interested in signaling to the general public, but rather only to other people in their own group. And these are knowledgeable about the products and can recognize the product without it having a prominent brand logo.

So while both groups may be willing to pay more for luxury items, the importance of the logo as a signal really is quite different. The nouveau riche group wants a prominent logo so that the signal sent by the handbag is clear to everybody, to the general public. The patrician group is not interested in sending a signal to the general public, but rather in sending a quieter signal that is most likely to be understood or received only by other members of their own group who are equally knowledgeable about the product.

Croft: What were the main findings from your study? Were consumers more willing to purchase the LV handbag with the quiet logo or the loud logo?

Deily: We did, in fact, find that consumers were willing to pay quite a sizable premium in dollars, about $161 to $174, which translated into about 17% to 18% of the retail price. This premium, this willingness to pay was higher for the quiet handbags as compared to loud handbags. Thus, there were really two different groups of people interested in two different kinds of signals, and the knowledgeable patricians were willing to pay more for a bag that did not send a loud signal. Second, we found, as we expected, that this patrician group were willing to pay a premium, but that premium shrank more quickly as the condition of the quiet handbags declined—more quickly than the nouveau riche group. Their willingness to pay also declined, but more slowly.

Croft: Going back to a point Oliver brought up at the beginning about the conventional wisdom. It would have seemed at first blush here that paying a premium, paying a higher price for something that is a quiet logo or less ostentatious representation of the brand would be counterintuitive to that conventional wisdom, would it not?

Yao: Absolutely, Jack. That's why our paper, in addition to making some very interesting, significant contributions to the theory, actually also makes some nice contributions to practitioners. And we have some very interesting manager implications for the practitioners. First of all, I think the manager implications can be back right to Louis Vuitton. When Louis Vuitton put two identical, other than the signals, bags on sale, like the data we collected in our study, they actually priced them identical as well.

That begs the question, the finding from our research: If consumers are willing to pay 17% more for one over another, why [would] you price the same, identical for both? Doesn't make sense, right? You can easily price the quiet bag 17% more than the other. The consumer, they are still happy to pay for that. And then by doing that, potentially the company can maximize or improve their profitability. Of course, our findings shouldn't be limited to LV, and we believe the findings can be generalized to other luxury goods companies as well. When they price their products, they may want to keep the consumers’ willingness to pay for quiet signals more than loud signals. They may want to keep that in mind when they price their products.

Croft: Even though consumers may not be the target market of the study itself, are there any takeaways for consumers from the research, from what you found?

Yao: The main takeaways are for the firms, how do they price their products. But I think there are some takeaways for the consumers as well. For example, I don't see in the very foreseeable future [that] I would go buy an LV handbag, but if I ever will go to buy some LV handbags and there are two handbags and I cannot make a decision which one to buy, then I should buy the quiet one. Because I pay the same price, but consumers will value that more than the other one, right? That means that I get a better deal buying the quiet handbag. So that's a quick takeaway for consumers.

Deily: You could think of that literally as if you think you'd use the bag for a year or two and then sell it on eBay or something, you'd get a higher price for the quiet bag then.