Sep 22 2010

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

TDeluxe: How Luxury Lost Its Luster – Dana Thomas – Books – Review – New York Times

Unit 2 in IB and AP Economics begins by examining the interaction of supply and demand in product markets, and the importance of these factors in determining the equilibrium price in any particular product market.

In the above article from the NY times, the author reviews a book that exposes the diminished quality and attention to detail among manufacturers of luxury goods (think Prada, Gucci, etc…) The era of globalization and off-shoring of manufacturing has aided luxury firms in their quest for profits, as they’ve been able to significantly cut costs while maintaining exorbitant prices for their product.

The author takes issue with the alleged demise in the luxury market of attention to detail and craftsmanship, as competition and profit seeking behavior have led to an industry where the back alley workshops of Milan and Paris have been replaced by the factory floors of China and Vietnam. Free trade has allowed European luxury brands to produce more of their products at lower costs, which leads the author to her current question: “Why is this stuff still so expensive even as the cost of producing it goes down?”

Despite her accusations of poor quality and greedy, profit seeking managers in the luxury goods industry, the author seem unable to resist the luxury goods she claims to despise:

When, I asked myself, did it become commonplace to charge several thousand dollars for a mass-produced handbag? How could the flimsy designer sundress I bought on sale (a “steal”, the saleswoman assured me) still wind up costing a whole month’s salary? Why is my favorite brand of lipstick more expensive than a nice bottle of Italian wine? When did these products’ values grow so distorted, and what is the would-be customer to make of it all?

The author continues…

the luxury industry is a sham because its offerings in no way merit the high price tags they command. Yet once upon a time, they most certainly did. In the 19th and early 20th centuries, when many of luxury’s founding fathers first set up shop, paying more money meant getting something truly exceptional. Dresses from Christian Dior, luggage from Louis Vuitton, jewelry from Cartier: in the golden period of luxury, these items carried prestige because of their superior craftsmanship and design. True, only the very privileged could afford them, but it was this exclusivity that gave them their cachet. Although they may have “cared about making a profit” the merchants who served this pampered class aimed chiefly to produce the finest products possible.

It appears that the author never took an introductory economics course. If she had, she would clearly understand that price is not determined by the level of craftsmanship, the attention to detail, nor the level of exclusivity represented by a particular purse, shoe or dress. Rather, price is determined by the interaction of Demand AND Supply in the market for all goods, EVEN luxury goods!

When she claims that “the merchents who served this pampered class aimed chiefly ‘to produce the finest products possible'”, the reviewer is forgetting some of the basic teachings of capitalism’s founding father. Adam Smith himself could have corrected the NYT reviewer when he said,

Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer…

Smith knew as any economics student should know that exchanges in any market happen not because of a mutual appreciation for craftsmanship or artistry, rather because a producer (firm) wants to make a profit by charging as high a price possible to a consumer (household). In the case of luxury goods, Gucci and Prada never made high quality goods because they loved making high quality goods, rather they made them cause consumers demanded them and were willing to pay top dollar for them.

What the author is missing is a basic understanding of the determinants of Demand. The price a good commands in the market has little to do with how much it cost to produce or where it was produced, and everything to do with the level of demand relative to the level of supply.

Discussion questions:

  1. Why do Prada, Gucci, Cartier and other luxury brands command such high prices relative to cheaper substitutes widely available to consumers?
  2. As nothing else changes and the price of luxury goods goes up, how is demand affected? Explain.
  3. What are some of the determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

38 responses so far

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

  1. timothysunon 29 Aug 2007 at 6:07 pm

    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…

  2. welkerjasonon 29 Aug 2007 at 6:44 pm

    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!

  3. moritzreithmayron 26 Sep 2008 at 1:44 am

    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.

  4. KReminon 26 Sep 2008 at 5:51 am

    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.

  5. Bjornon 27 Sep 2008 at 11:53 pm

    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.

  6. Bjorn Kvaaleon 29 Sep 2008 at 1:22 am

    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.

  7. Yael Burlaon 02 Oct 2008 at 4:50 pm

    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.

  8. AndreaEgglion 22 Oct 2008 at 1:47 am

    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.

  9. Maren Rackebrandton 22 Oct 2008 at 3:22 am

    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.

  10. kvoskuilon 17 Sep 2009 at 5:24 pm

    The reason why luxury good brands like Gucci and Prada can charge such high priced goods, is for the most part, because they can. Since the brands have been around for such a long time and the high quality and craftsmanship is well know consumers will by the luxury goods. Consumers buy the high priced products because they can, and because they believe the benefit of buying a higher priced good, but not always quality, is greater than buying a lower priced good. Usually, the luxury good is also known as a “must have” good, which is an incentive to buy the product, to appear wealthy and well off.

    If nothing changes and the price of the luxury good goes up it will have to do with the preferences of consumers. For example, consumers change their preferences over time, in seasons or moods of consumers. The tastes of consumers also change, so consumers buy different products according to their preferences. So the demand of brown handbags might increase in the fall season instead of beige handbags in the spring. Sometimes, products are considered “in” when their price goes up and many consumers aren’t able to afford the product. This affects the demand because everyone wants it to be known and respected.

    The price of luxury goods has remained high because the demand has stayed high as well. Since there are many producers of luxury goods not everything is sold so the prices of the unwanted goods decrease and the prices of the wanted goods increase to sell the unwanted goods. Another reason could be that the luxury goods producers are known for high quality and craftsmanship so they find it right to sell them at high prices. Another interesting point is that many luxury goods producers charge their products with the price of the brand, meaning that a partial part of the price of a luxury good is the brand itself. Consumers pay for the brand when they buy branded products. For example, you can buy an ipod from Apple and pay for the apple brand or an Mp3 player from a Phillips without paying as much and being able to do the same functions.

  11. cfrancoison 17 Sep 2009 at 6:07 pm

    1. Why do Prada, Gucci, Cartier and other luxury brands command such high prices relative to cheaper substitutes widely available to consumers?

    This is because, as it says in the article, even their prices are determined by demand and supply. The reason why these products are so expensive is because they are all produced in very low quantity and many people want them making them purposely scarce. That then allows the firms or companies to sell them for exorbitant prices and get a lot of profit.

    2. As nothing else changes and the price of luxury goods goes up, how is demand affected? Explain.

    The demand stay still because the produce will always try to grow higher but once again with demand and supply the price does have to go down because of the fashion change or something or other that will require the companies to change what is in stock so that the expensive items will be sold for less and then the new fashion items will be sold for more because they are in demand.

    3. What are some of the determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing?

    The demand determines the price of the luxury good, even if it is a very high luxury good if there is no demand then the price will go lower and lower and the new in fashion product will be the product whose price is kept high. When there is a high demand and a low supply the price will be raised and if you can manipulate these factors well then you can sell luxury goods at very high prices but they are produced in cheap overseas factories therefore giving the company lots of profit.

  12. Nora Balbonion 18 Sep 2009 at 2:59 am

    1. Luxury brands are able to keep their products at a high price even though their production cost may be low because, as the increasing demand shows, consumers are willing to pay these high prices. The factors that determine demand (determinants of demand) have to do with why consumers don’t simply buy cheap substitutes that serve the same purpose. Because of the “snob value” that these luxury products have, and for the middle class provide a “must have” to “show what you can buy”, they are not affected by the price of other products, not even potential substitutes.

    2.Luxury goods belong to Veblen goods, which is a group of products where the demand rises as the price rises. Unlike normal goods, these luxury products become more popular as their price rises because people get satisfaction from being seen by other people to consume expensive products. So, ceteris paribus, when the price of luxury goods goes up, people with high incomes begin to buy more of the product because it is a “good of exhibition”, and the demand actually rises.

    3.Income affects the fact that luxury brand goods keep on having a high price, because as incomes rise, people will use their extra money to buy even more of these luxury goods, instead of spending it on something useful. This is because people think that owning products such as these makes them look better in society.

    These products are something that the consumers show to as many people as possible, meaning that taste also affects the high demand of luxury products. The marketing of the luxury brands influences people’s tastes, making them believe they like the expensive luxury products more than cheaper substitutes.

  13. Silvia Dieteron 18 Sep 2009 at 12:50 pm

    1. Luxury Brands command high prices even though their production costs are relatively low because the demand for these products are high. The consumers (especially rich people) are willing to spend a lot of money on luxury goods to set a wealthy image.

    2. The demand for the luxury goods would decrease. These kinds of goods are expensive and when the price goes up, the goods get even more expensive. Therefore it is most likely that less people can afford luxury goods. Presumable there would be consumers which still can afford luxury goods, but the demand would decrease.

    3. Some determinants of demand which have kept the price of luxury brand goods high are supposable the income of the consumer and the preferences.

  14. Jason Fedoron 24 Sep 2009 at 1:20 am

    1. The famous luxury brands, such as Prada and Gucci command exorbitant prices for 'designer' items, even though they have recently started making many of them in factories, or cheap labor in places such as China. The reason? It mostly has to do with supply and demand. These fashionable items, no matter their price, will be bought by a large population simply because of the brand name, and the image that comes with it. The demand curve for these products shows that people are willing to pay large amounts for these brands. With a high demand, and a low supply (the companies purposely do not manufacture very many of them), the prices rocket up to an extreme level.

    2. Ceteris Paribus, if the prices of the designer goods increased even more, I think the quantity demand would stay pretty close to where it was initially. Because most consumers prefer a luxury brand, most of those who could afford to buy the item at the normal price would also pay at a higher price – because of the high demand and low supply of the designer items, rich people with large enough incomes to be buying these expensive items would probably continue purchasing these items. However, according to the law of demand, quantity demanded decreases as the price increases. This, of course, is correct, since there will be some people who can barely afford the normal price, and will not purchase any at a higher price.

    3. The main determinant of demand that affects the prices of luxury goods would be T – tastes and preferences – since the main reason while people purchase the most expensive items instead of cheaper substitutes is because their utility would increase more with a luxury item, because they would prefer it.

  15. Lara Fuhrmannon 25 Sep 2009 at 2:31 am

    1.) Luxury brands can afford such high prices, because even though the production can be cheap, the demand for them is very high. Rich people such as celebrities love spending their money on luxury goods. Because they feel special that way, the products are scarce, limited and desirable. If the luxury good would become cheap, no one who's rich will buy those goods anymore, because now everybody wears or has them, so it's no more special for them.

    2.) As the price would go up, the demand would go down. Because those goods are expensive so if the price goes up, less people can afford this products. So it would be an inferior product, because when the price goes up, the demand goes down, so there is an inverse relationship.

    3.) The determinants who made the price more expensive, but the demand stayed the same would be some mor taste in a product or a healthy message. So if it gets more expensive people would stil buy it because it's healthy or it tastes wrily good.

  16. Ray Remmerton 25 Sep 2009 at 4:50 pm

    Designer Brands such a Gucci, Prada, etc, can demand high prices for their products because people are willing to pay more money to feel special and upper class. All designer brands are associated with wealth and, in many cases, upper class society. Designer brand Companies market their product with the intent that it will attract the rich. Most everyone wants to be rich and have money so it draws in middle class people as well. Of course wealthy people can buy Designer products easier as they have more money, buy middle class people are willing to spend large amounts of money on name Brands to feel superior.

  17. Christa_bon 25 Sep 2009 at 6:03 pm

    1. The designer labels are able to charge high prices for their goods because they are high in demand. Designer labels have the reputation of wealth, and upper class. People would rather buy a handbag from Prada rather than H&M simply because of what the name brings with it. By having the designer label, instead of the subsititute, people feel more special because the designer name shows wealth.

    2. If the price of the designer good goes up then the quantity of demand will certainly decrease, because people will no longer be willing to pay for the goods. Even so, the demand for the luxury good will still be high just because of the designer name and the satisfaction people get from being able to own something that expensive.

    3. People's preferences are a determinant of demand that affects the prices of luxury goods. People want to feel wealthy and superior so they would prefer to have a handbag from Prada instead of H&M because the Prada label shows wealth. Income is another determinant in demand that affects the prices, because when someone's income increasees they want to show the new wealth, and owning a luxury good shows that.

  18. Sarahon 25 Sep 2009 at 8:53 pm

    1.Why do Prada, Gucci, Cartier and other luxury brands command such high prices relative to cheaper substitutes widely available to consumers?

    They command such high prices because the consumers of the products of those brands demand expensive goods. Luxury goods are Veblen goods. Veblen’s theory was/is that people get satisfaction from being seen by other people to consume expensive products. Those products do not even have be good quality, it is just the label that make people buy it.

    2. As nothing else changes and the price of luxury goods goes up, how is demand affected? Explain.

    As the price of a luxury good goes up, it achieves “snob value status” and as soon as it achieved this status the demand will increase since more people want to have the luxury goods that give them the feeling of satisfaction and happiness.

    3. What are some of the determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing?

    One determinant is their “old” reputation. Those luxury brands were found in the 19th and early 20th century when the demand for high quality goods was very high. Those labels wanted to produce at the absolute highest quality what did cost a lot during that time. And now, even though the quality isn’t at its old good level anymore since it is cheaply produced in China and Vietnam the brands can still charge those prices because of their reputation.

    The more important determinant though is the level of demand and the level of supply. Those brands produce only as much as they want the price to rise, meaning they stop producing a good at the point where the price would be too low for the brand, for example they often only produce one or two exemplars of one dress in order to sell it at an extremely high price. This gives the product the exceptionality that the demanders want. So as the demand increases, but the supply stays at a relatively low level, the price will be very high.

  19. Sarahon 25 Sep 2009 at 8:55 pm

    1.Why do Prada, Gucci, Cartier and other luxury brands command such high prices relative to cheaper substitutes widely available to consumers?

    They command such high prices because the consumers of the products of those brands demand expensive goods. Luxury goods are Veblen goods. Veblen’s theory was/is that people get satisfaction from being seen by other people to consume expensive products. Those products do not even have be good quality, it is just the label that make people buy it.

    2. As nothing else changes and the price of luxury goods goes up, how is demand affected? Explain.

    As the price of a luxury good goes up, it achieves “snob value status” and as soon as it achieved this status the demand will increase since more people want to have the luxury goods that give them the feeling of satisfaction and happiness.

    3. What are some of the determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing?

    One determinant is their “old” reputation. Those luxury brands were found in the 19th and early 20th century when the demand for high quality goods was very high. Those labels wanted to produce at the absolute highest quality what did cost a lot during that time. And now, even though the quality isn’t at its old good level anymore since it is cheaply produced in China and Vietnam the brands can still charge those prices because of their reputation.

    The more important determinant though is the level of demand and the level of supply. Those brands produce only as much as they want the price to rise, meaning they stop producing a good at the point where the price would be too low for the brand, for example they often only produce one or two exemplars of one dress in order to sell it at an extremely high price. This gives the product the exceptionality that the demanders want. So as the demand increases, but the supply stays at a relatively low level, the price will be very high.

  20. Bjorn Borgerson 25 Sep 2009 at 8:55 pm

    Supply and Demand bases on the principal that people have the choice to buy and sell. If the consumer receives enough marginal utility per dollar that they pay, they will purchase the product. Therefore, there is no way of being ripped off in free trade, since you will only "trade" if you see the benifits in doing so. Really, we never get exactly what we are paying for. It doesn't cost Prada 1000 Sfr.- to produce the handbag using leather, but over time, it has become a status symbol that people are willing to pay for, even if the craftsmanship is reduced. Similarly, and product being sold in the world makes some kind of profit, all with different margins. When you buy an orange, the firm makes a profit, which is no different to prada. Without profits, there wouldn't be any initiative to innovate.

  21. Sarahon 25 Sep 2009 at 8:55 pm

    oooppss.. sorry 😀

  22. Hannaon 27 Sep 2009 at 12:58 am

    The reason why luxury brands command such high prices relative to cheaper substitutes is because consumers are still willing to buy them, even though substitutes are so widely available and much cheaper. Before, when the luxury products were actually worth the money that they are sold for, rich people were willing to buy them because they were of good quality and made with great detail. This established a good reputation that has lasted even though the products are now produced at much lower costs. Most people probably are not aware of that, and still believe that expensive brands have better quality, which is why they choose to buy expensive luxury goods instead of cheaper goods.

    The determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing, are income and preferences. One determinant is income because when people’s incomes increase, their demand for more expensive products also increases. Luxury brands are a type of Veblen good, because the demand for the product rises when the price increases. This is because some people get satisfaction from people seeing that they are consuming expensive goods. People that have high incomes buy the luxury brands because they are able to and because it lets other people know that they are rich, which gives them satisfaction.

  23. Bjorn Kvaaleon 27 Sep 2009 at 7:55 pm

    The price of luxury handbags is determined by the supply of the handbags and the demand for the handbags. As the production of this luxury good is outsourced to Asia, the supplier (Prada, Louis Vuitton, etc.) is able to reduce the resource costs (a determinant of supply). By using supply and demand analysis, we can see that the supply of the handbags should shift out to the right, reducing the price of the handbags (assuming perfect competition). The demand, on the other hand, might have increased due to one of the determinants of demand (TOEISS). Over the past century, consumer's income on a whole has increased, allowing more consumers to buy luxury goods. Also, consumer's tastes and preferences could have been geared more towards luxury goods. Both of the these determinants could lead to the demand shifting out to the right, therefore keeping the price high. Also, the luxury handbag market is not a perfectly competitive market. Therefore, the market is neither allocatively (P=MC) nor productively efficient (P=lowest ATC). This keeps the price higher than it would be in a perfectly competitive market.

  24. Duy Anhon 27 Sep 2009 at 11:49 pm

    1. Why do Prada, Gucci, Cartier and other luxury brands command such high prices relative to cheaper substitutes widely available to consumers?

    They can charge higher price simply because they can. These brands represent something "truly exceptional", which is considered "snob value". Even though they started out-sourcing, making products in China, Vietnam, India or Bangladesh, where labor costs less than in the States or in Europe, they still charge high price, because there are still many people willing to buy their products. They find more utility in buying a luxurious LV handbag than buying a bag from an "unknown-brand".

    2. As nothing else changes and the price of luxury goods goes up, how is demand affected? Explain.

    As nothing else changes and the price of luxury goods goes up, the demand for these products will rise. Luxury goods can be considered Veblen goods. The characteristic of Veblen goods is that the higher the price, the higher the demand, as when the product achieves its "snob value", people will find more happiness, and superiority when buying the products.

    3. What are some of the determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing?

    The determinants of demand that kept the price of luxury brand goods high are those of consumers' preferences and incomes. As a matter of fact, only people with high incomes can afford to buy such goods, and they are more than willing to buy them when their incomes are higher. As stated in the original article, these brand have been around for many years, building reputation as companies which “produce the finest products possible". This has influenced consumers' taste a great deal, making them consider buying clothes, handbags, etc from the big brands.

  25. Vincenton 28 Sep 2009 at 5:38 am

    1.Why do Prada, Gucci, Cartier and other luxury brands command such high prices relative to cheaper substitutes widely available to consumers?

    Prada, Gucci, Cartier and other luxury brands command such high prices because costumers are able and willing to pay for their desirable goods. Since the luxury market is targeting the rich, the price does not matter as much as of other goods. For costumers, the marginal benefit (utility) is far higher than the marginal cost for a product. Also, people identify their status in society with these goods. Consumers of luxury goods pay mostly for the name and image of the product and not necessarily for better quality.

    2.As nothing else changes and the price of luxury goods goes up, how is demand affected? Explain.

    Luxury goods are usually Veblen goods, meaning that there is a direct relationship between price and demand. Ceteris paribus; as the price goes down, the demand also goes down and the other way around.

    3.What are some of the determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing

    The preference of luxury goods kept the price of luxury brand goods high. A high, consistent size of the market and high incomes also contributed to the high price of luxury goods.

  26. Alexander Elyon 28 Sep 2009 at 6:01 am

    The prices of luxury goods are able to remain so high because their supply is extremely limited. Knockoff handbags can be found virtually anywhere and in great quantity. Luxury brands produce much fewer of their goods, leading to higher prices.

    Demand goes up ceteris paribus because the price itself is one of the desirable qualities of luxury goods. The prestige and status a higher-priced good provides gives a marginal benefit (to those who can afford it) to buy it at an increased cost in order to raise their perceived status level.

    Tastes, income and other realated goods all keep the prices of luxury goods high. Consumers still have a taste for the status and prestige the luxury labels and the high prices of their goods provide. High income is needed to afford high-end goods. Finally, the fact that other related goods (such as the knockoffs) are less expensive drives some to purchase the more expensive goods instead.

  27. Graham N.on 25 Sep 2010 at 6:16 am

    1. These luxury brands command high prices relative to cheaper substitutes because the luxury handbag market is oligopolistic in nature. There are only a handful of firms producing luxury goods, they all have significant market power, and the barriers to entry in the luxury good market are high.

    2. Based on the Law of Demand, as the price of luxury goods goes up, ceteris paribus, the quantity of demand should decrease. The Demand stays the same because all non-price determinants have been fixed.

    3. The main determinants of demand that have kept the price of luxury brand goods high are the tastes of consumers and expectations of the future. Consumers expect the price of luxury goods to remain high, so they see them as a useful method to display their wealth. Consumers also "enjoy" or "like" designer brands, and wish to purchase them.

  28. Anuon 25 Sep 2010 at 6:45 pm

    1. The luxury brands are able to charge higher prices than other 'cheaper substitutes' because there exists enough demand for these goods to merit the price. Luxury goods are differentiated highly from cheaper goods, through brand name and trend-setting designs for example which appeal to many consumers tastes and preferences of being 'hip or fashion-in'. Another reason is the scarcity of original luxury goods in comparison to the myriad fakes or unbranded goods.

    2. If nothing else changes, and the price of luxury goods increases, then the quantity of the goods demanded decreases, following the Law of Demand. However, the total demand for luxury goods remains the same because there has been no change in non-price determinants.

    3. Some of the determinants of demand that have kept the price of luxury goods high include an increase in market size (through increasing income), and the "bandwagon" effect. As more and more people in developing nations such as China, and India among others begin to have higher incomes (due to the countries' rapid economic growth), many people begin to demand and buy luxury goods – which are status symbols. This increases the market size and therefore total demand for luxury goods. Also, luxury brands invest heavily in marketing. Through advertisements and celebrity brand ambassadors, luxury goods become more desirable.

    General comment: Another thing the NYT reviewer fails to mention is the cost of branding and marketing luxury good companies face. The goods may be created cheaper in developing countries, but the luxury brands have other operating costs as well. The operating margin for most luxury firms (according to company data) is only about 20% before income tax.

  29. Alain Meyeron 27 Sep 2010 at 1:15 am

    1. Prada, Gucci, Cartier and other luxury brands can command such high prices because there's a high demand for them with relatively small supply in comparison to cheaper substitutes available. These brands differentiate highly with their name and retail locations, allowing them to command higher prices. It's a rather oligopolistic market (high end bag manufacturing) and so they're also able to work together, I'm sure, to create higher prices.

    2. As the price of luxury goods increases, quantity demand will decrease proportionally as goes the Law of Demand. Demand, however, will remain the same, as price itself cannot change the demand.

    3. Some of the determinants of demand that have kept the price of luxury goods high are the tastes of consumers and the market size, as well as the bandwagon effect. The tastes of the general population are leaning towards those of the stars of our generation. We become heavily influenced by powerful people, and with the advent of the internet and television, we are able to be exposed more to luxury items. Incomes of what used to be 3rd-world countries are rising. As they are able to pay for luxury goods, the market size increases for those companies. This increases demand. Lastly, a big part of modern day society is purchasing what everyone else is purchasing. Similar to the tastes stated above, as more people purchase luxury goods, the more others will want to do the same.

  30. Gil Glasenbergon 03 Oct 2010 at 10:45 pm

    1. These luxury brands have a lot of demand which gives them the reason to have such a high price to sell their products. There is not much supply in these luxury brands but rather by charging at a higher price not as many people will buy it but people with money will buy it because it is a demand factor and probably uses limited resources in their factories.

    2. As the price goes up the product will definitely lose some demand as the price is too high for the people but it will still be able to maintain its supply. The quantity will decrease over time as well.

    3. Some determinants could be the promotion structure to which the brand attracts its product or could be due to a change in taste of the buyers or even the seasonal change. The brand could release many new products and have a popular marketing structure.

  31. Francesca Perversion 03 Oct 2010 at 10:47 pm

    1.These brands have a lot of customers who stay loyal to their products and who are willing to pay a large amount of money for the goods. These can be considered Veblen goods as consumers buy them to show their wealth. Are goods that rich people demand more as the price goes up because it send a signal so they are willing to pay a large sum to increase their status in society. The determinants of demand have to do with why consumers don’t simply buy cheap substitutes that serve the same purpose.

    2. these luxury products become more popular as their price rises because people get satisfaction from being seen by other people to consume expensive products. So, when the price of these goods goes up, people with high incomes begin to buy more of the product because it is a ostentatious good, and the demand actually rises; so consumers will continue to buy those goods because it make them look rich.

    3.demand of luxury goods is not decreasing due to a number of reasons such as: rich people can still afford to buy those goods; more people choose to allocate their income in luxury goods in order to show a real or pretended status; emerging markets such as China or Russia increase their demand of those goods. Since demand is not decreasing but even increasing there is no need for producers of luxury goods to decrease their price on the market and as their costs decrease they get as a result a higher profit.

  32. Pilar Mulleron 05 Oct 2010 at 3:27 pm

    Luxury goods from posh brands like Prada, Gucci, Chanel etc., can be seen as either normal goods or especially as veblen goods. As the  income of a consumer rises, the more a consumer will demand of normal goods (like e.g cars). Veblen goods have a very special characteristic of demand because as the price of a veblen good (fur coats, jewelry, luxury 
    goods…) rises, the more consumers demand. This then results in an upward sloping demand curve, instead of a downward sloping demand curve. Thus, this means that as price rises, demand increases. The perfect ideal for any producer. 
    So in this case of luxury goods, consumers do not want to go for substitute goods, but
    instead want to buy this very expensive good in order to show off. Mainly, veblen goods are bought or consumed in order to show off one's wealth. A similar example would be one with the restaurant market. So if there are two restaurants that serve very similar food (like in the example from Mr. Welker's textbook), people can either decide to go to the fancy place or to the "rustical" place. If now one person goes to the very fancy restaurant, this surely accounts for his want to show off his monetary wealth. 
    Also if the fancy restaurant, were to increase its prices, it would not be harmful, because as the characteristic of veblen good says: As the price increases, demand increases.   

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