Comments on: Luxury goods: the biggest rip off in the world or the “must have items” for any self-respecting European?

By: Maren Rackebrandt

Maren Rackebrandt — Tue, 21 Oct 2008 18:22:15 +0000

The luxury brands sell their products for high prices, because the consumers are willing to pay those amounts of money for them. Of course a reason that people buy those products is that this has something to do with the name of the brand which reflects luxury and shows the wealth of the people. Hardly anybody would buy a purse or a dress for many thousand dollars if nobody knows who made it.
Also important are the determinants of demand. TOEISS: tastes and preferences, other related goods, expectations of the future, income, size of the market and special circumstances. These factors can cause a change in demand. When tastes and preferences change, which means that those luxury goods are not wanted anymore, of course the demand decreases. There’s an inverse relationship between the good and it’s complement, so if the complements price decreases the price of the good will increase. On the other hand there’s a direct relationship between substitute goods. Expectations are the prices of the future, especially income prices are important to look at, because they can change the demand of the consumers of one good. Luxury goods are inferior goods. If the people get more income they will more likely buy a luxury good than something else. The last two determinants are size of the market and special circumstances. If the market is growing there’s more competition and so the same goods can be bought somewhere else for almost the same price. The demand decreases. Special circumstances are something that usually not happen for example a hurricane.
The determinants of demand which kept the prices of luxury goods high even if their production got cheaper are most likely tastes and preferences, complement goods and income.

By: AndreaEggli

AndreaEggli — Tue, 21 Oct 2008 16:47:27 +0000

1) Brands like Gucci, Prada and Cartier have been on the market for a very long time already. They have a lot of customers who stay loyal to their products and who are willing to pay a large amount of money for the good. Customers believe that their status and image increases when they have brand products. Rich people are therefore, willing to pay a large sum to increase their status in society. Prada and Gucci know this characteristic of their customers and can therefore, raise prizes and still sell their products.

2) The demand on the Prada and Gucci bags is slightly going to decrease. Some of the customers will not be able to pay the new prizes and will have to stop buying the branded products. However, some of the customers will continue buying the luxury products because they still have enough money. These customers will not stop buying the products which makes them look even richer.

3) The luxury goods were able to keep or even raise their prices because they have specific determinants of demand. One of these determinants is the preferences of the customers. When the customer loves the new Prada bag he or she will be willing to pay a large amount of money for it. In addition, many people have been successful in their careers and have a greater income. When people have a greater income they want to show this and buy luxury goods.

By: Yael Burla

Yael Burla — Thu, 02 Oct 2008 07:50:36 +0000

The determinants of demand apply to this situation where the firms sell the goods at very high prices in great quantities. For example, one determinant is tastes and preferences, where society have preferences to certain jewelry and bags over other inferior goods. If someone is making enough money as their income, another determinant, he/she can buy more expensive, luxerious goods to fullfil their utility. With these two determinants in mind, firms can produce more of the product and make higher profits. The demand curve will only shift if and when the determinants of demand take place, not when the price does; if the price of these goods were to increase, the quantity demand of the goods would increase, not the actual demand of the product. In fact, the actual demand of the product would decrease since there is an inverse relationship; people would not buy more and higher prices but they would at lower prices. This contradicts what the woman in the article says, and emphasizes her slight ignorance on the matter of demand.

By: Bjorn Kvaale

Bjorn Kvaale — Sun, 28 Sep 2008 16:22:19 +0000

Seeing as there is a demand for these luxury products and the brand seems to be more important than the label for the consumers, luxury companies have been able to maximize profit by minimizing costs and keeping a high price. People demand these luxury goods due to TOIESS, the determinants of demand. Consumer’s taste is definitely a main factor to the relatively high demand for these products. Also, when a consumer’s income increases, they can afford these expensive products because their real income is higher than it was before.
I have another example of demand. A couple of years ago, VW decided to make a luxury car, the VW Phaeton. This car did not sell that well though because people were expecting relatively cheap cars from VW, not expensive and luxurious cars. If they wanted a luxurious car, they can just as well buy a car from VW’s brother, Audi. People’s expectation of VW is not an expensive car, but a well-priced and good-quality car. Supply and demand plays a huge role in all companies and although quality is important to maintain customers, the determinants for demand are much more important.

By: Bjorn

Bjorn — Sat, 27 Sep 2008 14:53:28 +0000

Personally, I have some more examples of my own. Jaguar (in my eyes) used to be a brand which I associated with prestige and luxury. In the last few years however they have attempted to expand their market, and sell to lower income customers, also introduce a diesel version of their cars. In this case they have not produced the cars more cheaply, and sold it for the same price, but I feel that they ruined their image of a luxury brand, which in my eyes is a mistake. I also was a proud owner of a Tissot (swiss brand) touch watch. Yet only recently some of the functions no longer worked. When I had brought it to an shop they told me that because I had had the watch for 3 years, that the warranty was finished, and I would have to pay 300 Sfr.- for a new mechanism. When I buy a luxury good, such as a swiss watch, I would expect some quality, yet I am very disappointed with what really is the case.

By: KRemin

KRemin — Thu, 25 Sep 2008 20:51:33 +0000

All these designers demand such high prices because of several reasons. In the cases of Gucci, Louis Vuitton and other well known and ‘established’ designers that exist for several decades a major reason, I’d say, would be: because they can. They know that people are demanding their good at no matter what cost. This is due to the popularity of the product. It’s popular because everyone knows Louis Vuitton. They have ad campaigns in every fashion magazine and you can see it everywhere on the street. Further on, they have celebreties wear their stuff which causes which leads to more popularity.
Why do they set their prices so high? Yet again, because they can. Louis Vuitton Garments are veblen goods. They know that the demand will not go down if they raise their prices, but will go up if they just make the customer believe that it’s ‘limited’ and whatnot. Buying these handbags etc can be seen as conspicuous consumption therefore and one can say that Louis Vuitton have reached the snob value.

By: moritzreithmayr

moritzreithmayr — Thu, 25 Sep 2008 16:44:20 +0000

Prada, Louis Vitton etc. demand such high prices because their customers are willing to pay those high amounts and the companies want to maximize their profits. The people who buy luxury goods have a high amount of money and to them, the marginal costs of getting a more expensive bag rather than a much cheaper one is smaller than the marginal benefits of satisfying their preferences. In supply-and-demand-terms, the shift in the demand curve had the effect that more customers were willing to buy those goods. This allowed those companies to raise their prices without having to suffer from decreasing profit because there were still enough people willing to pay the higher prices.

In a ceteris paribus situation, the demand of normal goods shouldn’t change as it only changes when there is a change in tastes and preferences, substitutes or complements, income, expectations of the future, size of a market or when special circumstances(e.g. seasonal changes) occur. None of this would take place for normal goods, however, because we are talking about a luxury good the demand might actually increase due to a change in the preferences of consumers. The goods might become more popular because fewer people are able to buy them and, hence, they will be considered “in” and demand would rise due to a decrease in the quantity demanded.

Global trade made the size of the market of luxury goods increase and is one of the reasons which allowed luxury brands to keep the prices levels up while the costs of production are going down. Another reason might be a change in preferences if the marketing sections of those companies did a good job. Also, a change of income has occured as some people are getting richer and richer while others stay poor. Having an increasing number of rich people is of interest to those companies because these are the people who buy luxury goods.

By: welkerjason

welkerjason — Wed, 29 Aug 2007 09:44:35 +0000

Tim, try reading the article again, I just rewrote most of it, as the first draft was a bit crappy. I don’t think this article’s really about opportunity cost, although elasticity may indeed play a role here. This may be a good one to come back to and comment on once you’ve read chapter 3!

By: timothysun

timothysun — Wed, 29 Aug 2007 09:07:10 +0000

Hrm, since I think my post was far too concise (after seeing other people’s posts), I feel obliged to expand on the topic.

I am incorrect in asserting that she hasn’t weighed the opportunity costs, but she is contradicting her own analysis of the opportunity cost. This I consider to be an irrational decision as her thoughts are that the products are too expensive, yet she still purchases it.

It is interesting how lipstick is more expensive than wine. My only guess is that lipstick (a constituent of female life) has a greater demand along with the property of being virtually inelastic, while people can do without a non-neccesity; however, I don’t really consider lipstick to be a neccesity, so I’m back at square one…