Sea Change in Consumer Experiences

The global consumer’s ability to compare and contrast across countries has not always been the case. While markets have been traditionally separated by geography and language barriers, the study examines the implications of consumers observing first-hand through experiences abroad or word-of-mouth, the quality and varieties of products available in other markets, often amplified by social media. As a result, consumer demand may be substantially influenced by the products and services in other countries.

To analyse how this phenomenon affects international trade and related policies, Prof. Lien, in collaboration with Prof. Zeng Lian from Beijing Foreign Studies University, Lin Lu and Prof. Jie Zheng from Tsinghua University, conducted a study titled International Trade with Social Comparisons. They proposed a number of “social comparison” scenarios, or situations in which consumers socially compare their own consumption to that of consumers who are abroad, for home-produced goods, foreign goods, and combinations of such social comparisons for the domestic and foreign country, and looked at the implications for economic well-being.

The consumer comparisons are meaningful in that they may be able to become a matter of national policy. A “Home Comparison preference” (where consumers in one country make an international social comparison regarding a home-produced good), brings consumption and greater welfare benefits to the home country. On the other hand, global welfare is enhanced when both countries maintain these kinds of preferences for their own home goods, a situation the study calls a “Dual Home Comparison”. This is where each country’s consumers have a preference for its own home goods, but holds no preference over the other country’s endowed good. “For example, consumers in China want to have more Moutai than Americans do, while U.S. consumers want to consume more Bourbon whiskey than Chinese consumers do,” Prof. Lien explains.

Governments Should Highlight Domestic Products

Astute governments will cultivate a preference for home goods domestically. In the case of Hollywood movies for example, this can make their performance better off in the world market. “Governments should highlight the benefits of their domestically supplied product, especially if this product is not as readily available in other countries,” says Prof. Lien.

For example, China may highlight the widespread availability of fast and abundant home delivery services which may not be as abundant in other countries. The Chinese government might even want to internationally promote the likes of Chinese hard liquor Moutai, considered prestigious and high quality domestically. Since it has yet to become a trendy drink globally, there is very little for consumers to compare it to, which may have a net benefit in boosting consumption.

Be Careful of Who You Admire

A concept of “Mutual Foreign Envy” is also raised by the study, which the authors say contributes positively to global welfare. Analysis helps to explain the social welfare incentives of policy-makers in promoting cross-country comparisons of domestic goods among their own consumers, while advocating domestically produced goods as status symbols abroad.

For example, the study says U.S. consumers may want to have prevalent access to high-speed rail like China does, while consumers in China want to have spacious houses with backyards that are commonplace in the United States. Since there is mutual envy, the effects balance each other out.

“Encouraging admiration and social comparison of foreign products can be a risky and possibly disadvantageous approach, unless a country is confident that consumers in other countries reciprocate by viewing their products as status items.”

Prof. Jaimie Lien

On the other hand, the study finds “Foreign Envy” (comparison of a foreign-produced good) is disadvantageous to the home country, contributing negatively when the other country either prefers its own produced good or has no particular social preference. “A country which is alone in its admiration and consumption comparison of foreign products experiences lower utility outcomes than it would otherwise. Such welfare losses can only be avoided (and welfare gains obtained) if the other country simultaneously adopts its own analogous Foreign Envy preference,” says Prof. Lien.

One-sided Foreign Envy reduces the welfare of the home country and enhances the welfare of the foreign country. In the case of Mutual Foreign Envy, both countries experience welfare gains. Each country consumes less of its home-produced good and more of the foreign-produced good, and there is no conflict of interest. As Prof. Lien points out: “In other words, our model shows that encouraging admiration and social comparison of foreign products can be a risky and possibly disadvantageous approach, unless a country is confident that consumers in other countries reciprocate by viewing their products as status items.”

Governments Focus Inward While Comparisons Stay

As technology and travel continue to be an essential part of the economy, social comparisons across countries through social media, internet and travel are inevitable, with the dichotomy of inward-focused trade policies by several world economic powers.

By analysing a simple global economy that is free from geopolitical concerns, cultural factors and other complications, the study’s model explains why world leaders want to cultivate comparison-based preferences among citizens. This might be carried out in the media and government policies by emphasising the home-produced product and how fortunate domestic consumers are to have the consumption advantage in it compared to consumers in other countries.

“Domestically inward focused framing of consumption, and a cultivation of the feeling that home-produced goods are more desirable, has welfare advantages which policy-makers may be motivated to pursue,” Prof. Lien says.

The study provides a potential explanation for why countries go through periodic episodes of inward-focus, but very seldom encourage domestic citizens to idolise foreign products. A country can benefit in terms of both wealth and utility by promoting its products as comparison symbols abroad, hence as the study notes “the incentive to advertise is thus not only at the individual firm level, but at the national policy level.”

Prof. Lien notes that it would be ideal if a country can make its domestically supplied products globally admired and incite social comparisons internationally. In addition, “countries would like to avoid specialising in the production of items which consumers have little opportunity to form strong comparisons over, such as mundane household or personal use items,” Prof. Lien adds.

It is likely that consumer goods and brands will continue to play a significant role in the geopolitical landscape. As countries strive to establish themselves as global players, the products they produce and promote will be a critical factor in their success.

As a major and pressing public health threat, air pollution is responsible for around one third of deaths from stroke, chronic respiratory disease, and lung cancer, as well as one quarter of deaths from heart attack. Adding to all of that, air pollution also takes its toll on the economy in several ways, such as reduced workforce productivity, lower crop yields, and the massive cost of restoring the ecosystem.

Previous studies found that air pollution can change investment behaviour, cause behavioural bias and increase defensive expenditures. However, there is no direct evidence linking air pollution to household consumption in existing literature. “Household consumption is crucial to the national economy, and understanding factors that impact online household consumption is particularly important in this e-commerce era,” says Yang Yang, Assistant Professor at the School of Hotel and Tourism Management at The Chinese University of Hong Kong (CUHK) Business School.

“Our findings provide important implications on the role of environmental degradation in developing countries such as China and offer new insights that air pollution could generate much broader consequences than previously realised.”

Prof. Yang Yang

So, how does air pollution affect various kinds of online consumption? Will the effects persist over time? Why can air pollution induce different consumption responses? Prof. Yang and her collaborators sought to answer these questions in their latest study. She notes that air pollution is a significant issue in China, and its e-commerce has been seeing tremendous growth recently, which provides an ideal context for them to examine their research questions.

The study titled Online Consumption Response to Sustained Exposure to Air Pollution: Evidence from a Quasi-experiment in China, was conducted by Prof. Yang in collaboration with Prof. Sumit Agarwal at the National University of Singapore and Prof. Long Wang at the Fudan University.

Differences in Air Quality between South and North Cities

The researchers obtained a proprietary dataset from the largest e-commerce company in China, containing transaction information of sellers and consumers between 2017 and 2019. “The extensive coverage of 291 major cities in China is crucial as it can help identify the influence of air pollution,” Prof. Yang says. She also notes that detailed information on sellers enables them to categorise the consumption into three groups (health-related, necessities and non-essential products), which can help gain further insights into the consumption responses across product types.

In their research, Prof. Yang and her co-authors first examined the general relationship between air pollution and online spending on different product categories. They found that purchasing health-related products and necessities is positively associated with air pollution. More specifically, health-related products refer to medicine or healthcare, and necessities include products such as food, drinks and mother-care items. On the flip side, a negative correlation exists between non-essential goods consumption and air pollution. For example, when experiencing air pollution, people decrease their purchase of products related to entertainment, accessories, sports, and education, etc.

However, online consumption and air pollution may be spuriously correlated because of ignored variables such as regional characteristics. Researchers then moved to explore whether air pollution can be causally linked to online consumption by conducting two tests. Firstly, they compared situations in northern and southern cities divided by the Qinling-Huai River Line. Cities north of this line are affected by the coal-based centralised heating systems, which leads to drastic changes of PM10 concentrations in these cities during winter and creates different levels of air pollution between the northern and southern cities.

Increased or Decreased Purchases?

The results indicated that health-related consumption increased by 7 percent and necessity consumption increased by 7.7 percent due to the heating season. Meanwhile, the consumption of non-essential goods decreased by 3.6 percent. Additionally, the team found that the substantial increase in health-related products and necessities consumption reverted back to a normal level in the non-heating season, whereas the purchase of non-essential goods presented an opposite trend.

Secondly, she and her collaborators applied a different approach to testing the robustness of the above findings. They aggregate the Seller-BuyerCity-Month data to the BuyerCity-Year level, and found substantially larger causal effects. Moreover, the team examined the pollution effects separately in the heating and non-heating seasons. As expected, the effects were statistically significant only in heating seasons.

“The results support that air pollution caused by the coal-based heating system affects online consumption, and address the concerns of omitted variable bias,” says Prof. Yang, emphasising that both results of the above two tests support a causal interpretation of the impact of air pollution on online consumption.

Joint Mechanisms Behind the Causal Relationship

After establishing the causal relationship between air pollution and online consumption, Prof. Yang and her collaborators sought to explore the mechanism behind it. The team proposed two potential explanations: the “avoidance behaviour” hypothesis and the “negative mood” hypothesis. The study pointed out that the former refers to the change of people’s consumption paradigm toward online retail to avoid outdoor air pollution and increased willingness to pay for better air quality; the latter refers to negative emotions caused by long-term exposure to air pollution, which could reduce online consumption of some products.

To test these two hypotheses, the researchers collected search frequencies on two sets of keywords via Baidu (the most prominent Chinese search engine), including those related to air pollution and negative mood. Specifically, air-pollution-relevant words include haze, air quality, mask, air purifier, etc. At the same time, anxiety, depression, stress, and annoyance are some examples of negative-mood-related keywords.

The findings indicated that individuals increase spending on health-related products and necessities due to “avoidance behaviour”, and the “negative mood” helps explain the decreased purchase of non-essential items. Present results showed that the consumption of some goods increased while others decreased, “We cannot simply say whether air pollution stimulates or suppress online consumption as the effects are complex,” says Prof. Yang, adding that they categorised consumption into different groups to examine whether they respond to air pollution differently.

“Our research suggests that instead of the influence from a single mechanism, the avoidance behaviour and negative mood jointly contribute to explaining the various effects of air pollution on online consumption,” she says.

Takeaways for Consumers and Sellers

People may not have thought through why they increase or decrease the purchase of certain kinds of products during days of severe pollution. Prof. Yang notes that their findings can help consumers better understand the reasons behind these phenomena and realise the significant influences of air pollution. “Meanwhile, our findings may also be helpful to sellers, enabling their understanding of buyers’ preferences and then adjusting the stock accordingly,” she adds.

The researchers note that they contribute to the existing literature by first investigating the causal impact of air pollution on online consumption. While most studies about China’s heating systems and the Qinling-Huai River Line focus on their health-related influences, “Our findings provide important implications on the role of environmental degradation in developing countries such as China and offer new insights that air pollution could generate much broader consequences than previously realised,” Prof. Yang says, adding that their research is still ongoing and may have further discoveries on air pollution’s economic consequences by using individual-level data.

Finally, Prof. Yang emphasises again that their data shows a significant influence of air pollution on how people spend their money, which is worthy of attention. “As consumption is a fundamental component of economic activity, policymakers and government authorities should consider the influences of air pollution when implementing policies and strategies to promote sustainable consumption patterns.”