
TDeluxe: How Luxury Lost Its Luster - Dana Thomas - Books - Review - New York Times
Luxury goods “sold for profit”, author alleges | Free exchange | Economist.com
As our first unit in AP Economics winds down, we will soon begin studying the principles behind the function of product markets. A fundamental principle of product markets we will focus on is the interaction of supply and demand, 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 reviewer, as well as the book she reviews, seems to have a serious 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 supplanted by the factory floors of Shen Zhen and Hoh Chi Minh City.
The reviewer seems to have a hard time coming to grips with her own inability to express her dissatisfaction with the way the luxury market has gone. Despite her accusations of poor quality and greedy executives in the industry, she just can’t resist buying the goods with the golden name tags:
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 reviewer’s ignorance of how product markets function shines brightly in the above passage. Her lack of understanding of the interaction of supply and demand is further demonstrated when she speaks of the reviewed book’s author:
For Thomas, a cultural and fashion writer for Newsweek in Paris and the Paris correspondent for the Australian Harper’s Bazaar, 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.†(Italics added)
It appears that neither the NYT reviewer nor the author of the reviewed book ever took an introductory economics course, such as the AP class you’re all oh so enjoying right now! 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 are rooted not in some obscure sense of artistic appreciation, rather in the producer’s desire to make a profitable exchange for his or her wares. 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.
That they’re no longer made by hand in a back alley in Milan does not mean such products cannot command exorbitant prices in the market! After all, if the NYT reviewer were really so horrified by the price of the dress for which she gave up a whole month’s salary, then she would not have bought it in the first place! The fact that she still walked out of the store with the dress in her possession answers her very question of why luxury goods are still commanding the exorbitant prices they do despite the outsourcing of their production to massive factories in Asia: the DEMAND is still there!
What the author is missing is a basic understanding of the determinants of Demand. New wealth in Asia and the former soviet states means the size of the market for luxury goods has grown rapidly in recent decades. In addition, rising incomes in Western Europe and the USA and shifts in tastes and preferences towards high fashion, luxury goods as symbols of wealth have assured the industry an ever increasing level of demand. As any AP Economics student should understand, when Demand increases at a greater rate than supply, one thing is certain, and that is prices will go up! The price a good commands in the market has little to do with how much it cost to produce or where it was produce, and everything to do with the level of demand relative to the level of supply.
If only the author of book’s author and reviewer had sat through a semester of microeconomics in high school or college, they could have spared themselves such a humiliating misinterpretation of the luxury goods market!
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