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.

“We wanted to find out what prompted individuals to make supplemental health insurance purchases, because these insurance policies are important risk-reducing products that households can use to improve their overall well-being,” says Jaimie Lien, Assistant Professor at the Department of Decision Sciences and Managerial Economics at CUHK Business School, and one of the authors of the study. “We wanted to better understand whether such decisions are made by individuals in suitable circumstances, and to verify that people are not purchasing insurance when it is not actually needed, nor failing to purchase these products when it is in fact needed.”

The results of the study; which was conducted in collaboration with Prof. Gao Feng, Prof. Wang Jun, and Prof. Zheng Jie at Tsinghua University, and Dr. Wang Qian at Beijing Technology and Business University; suggest that households are not necessarily “over-purchasing” supplemental health insurance products, but are instead reminded about their true need for such products due to the media coverage of short-term high pollution levels.

Nationwide Study

Previous research conducted in a small number of major Chinese cities indicated that daily air pollution levels are positively correlated with the purchase of supplemental health insurance. In their latest study, Prof. Lien and her co-authors analysed the purchase of supplemental medical insurance, as well as a subcategory of insurance products covering serious illnesses, in nearly 260 Chinese cities which experienced fluctuating levels of air pollution levels between 2012 and 2016.

In going about their study, the researchers also decided to broaden their research to cover all households across China, instead of just those in large cities, in order to assemble a more representative picture of how pollution in the country affects the purchase of insurance products. Firstly, they obtained a dataset containing information, such as the policy’s premium amount, the length of coverage, claims, as well as demographic information, on nearly 2 million insurance policies. They then compared this information to air pollution levels across the country obtained from government agencies such as the China National Environmental Monitoring Center and the China Meteorological Data Network.

After analyzing their data, the researchers found support that rising air pollution in a given localised area is indeed linked to purchases of supplemental health insurance, in line with previous research. However, the study found no evidence of an overall increase in the purchase of critical illness insurance, specifically. “Our analysis suggests that, at least for critical illness insurance, while the timing of purchases can be affected by recent local pollution levels, it doesn’t lead to an overall volume of policies being purchased,” she says, adding instead that rising air pollution tends to hasten this purchasing behavior for individuals who would have made the purchase eventually anyway.

Explaining the Link

The researchers then turned their attention to explaining the link between air pollution levels and insurance purchasing behavior. Previous studies have attributed this link to a phenomenon known as “projection bias”. As an example of this, Prof. Lien says a person who witnesses heavy air pollution during a given period may come to the (incorrect) assumption that these conditions are likely to persist and affect them throughout a good portion of their life, and this would drive the purchase of supplemental health insurance. In this latest study, the researchers conducted a survey with over 1,000 respondents, and found no evidence that the residents of a given region base their future expectations of what air pollution would be like on current levels of air pollution, indicating that projection bias is unlikely to be the driver behind the relationship between air pollution and the purchase of insurance products.

Alternatively, Prof. Lien and her collaborators found robust evidence that general public attention and concern over the harmful effects of air pollution could actually be driving insurance purchases. To do this, the researchers examined the level of internet searches related to air pollution conditions on Baidu, China’s main search engine, as well as media reports. They found that both of these measures were strongly responsive to local recent air pollution measures. However, they found that it is media coverage of the harmful effects of air pollution that best explain households’ purchase timing of insurance products that cover critical illnesses.

Prof. Lien notes that since the results of the study show that individuals are highly sensitive to news media reporting when making decisions on insurance purchases, this highlights the importance of accurate and informative media reporting on health issues. “In making their insurance purchase decisions, people can be highly sensitive to reports in the news media, not to mention the wealth of information now available on the internet. Our research highlights the social benefits and importance of informative reporting on environmental issues, including on air pollution, which can in turn serve to remind individuals to make financial decisions that help address risks they think they may face later in life,” she adds.