Revenge consumption, product quality, and welfare

Revenge consumption, the situation in which the demand for specific goods and services suddenly skyrockets and remains high for an extended period of time, is a relatively new economic phenomenon observed recently in many cities around the world after the easing of restrictions associated with the coronavirus pandemic in 2020 and 2021. We study welfare implications of revenge consumption in a model of vertical product differentiation. We show that revenge consumption induces producing firms to enhance the quality levels and raise prices on their products. As the level of revenge consumption increases, social welfare initially increases but it eventually declines. Results, which hold across monopoly, duopolistic competition, and national brand-private label competition models, provide useful information for public policy.