Economic and Psychological Concepts Behind Luxury Consumption
What comes to mind when you think of brands like Chanel, Prada, and Dior? It’s probably images of extortionate price tags. Boasting price ranges that an average middle-class person probably can’t afford, it’s well known that these luxury brands are highly sought after in society. Luxury goods have been the topic of controversy for decades, as some people value the craftsmanship and rich history behind these brands, while others criticize the inaccessibility of luxury companies and their unethical practices. Despite the controversies and high price tags, what allows luxury brands to thrive, and how do economic concepts tie into this?
Where does the demand come from?
There might not be a tangible difference in quality between a regular bar of soap from a retail store and one made by Dior, but why is it that thousands of people are willing to buy the Dior one for $40? To answer this question, we need to understand how the term “Veblen goods” comes into play. Coined by Thorstein Veblen in his book The Theory of the Leisure Class, Veblen goods can be described as products whose demand increases as their price increases (Ravichandran, 2022). Interestingly, the concept of Veblen goods seems to contradict the law of demand, which theorizes that the demand for a product should decrease as its price increases.
The reason why Veblen goods violate the law of demand lies in what causes their allure. There are many psychological factors that influence consumers to purchase Veblen goods, like the need to appear socially well-off. In a study by Dubois et al. (2021), the authors claim that “The wearing of a luxury (versus non-luxury) brand can increase one’s perceived competence [24,32•,33], as well as social recognition, compliance, and economic rewards from others.” From this, we can note that the popularity of luxury brands comes from forces within one’s self, such as perceived quality, and the influence of society. As society popularizes certain luxury brands, consumers seek to elevate their statuses by owning products sold by the brands. Even though many luxury brands produce products with the same quality as non-luxury brands, the popularity of these brands, along with the one-of-a-kind shopping experience that they provide to customers, is a major reason why consumers purchase from them. Luxury brands strategically market their products as higher quality by utilizing factors such as premium packaging and personalized customer service, which come together to make the “luxury experience” worth it for plenty of people.
One of the main ways brands promote themselves as luxurious is through endorsing celebrities and influencers, who help create valuable exposure for the brands. The moment a celebrity or influencer wears a luxury item, you’ll see article after article being poured into the media raving about the product and its outrageous cost. The high market value, along with the brand’s association with the celebrity creates an image of exclusivity around these brands in the public eye. Many consumers obviously want to mimic their favorite celebrities, prompting them to purchase the same products as them, which creates a higher demand and increases the value of the brands.
Luxury Goods as an Investment
Interestingly, many people view luxury products as a form of investment. When thinking of ways to expand wealth, most people might only think about investing in stocks or gold. However, the growing value of certain used luxury brands indicates that reselling luxurious items even after years of owning them can make you a large profit. Take a classic Hermes Birkin as an example. According to luxury handbag reseller site Baghunter, a pre-owned Birkin in well-maintained condition increases in value by 14.2% annually, a figure much larger than the return values of investing in S&P 500 stocks or gold, which are about 11.66% and 1.9%, respectively (2016). This percentage indicates that owning products from brands with a long and reputable reputation like Hermes is an exceptional form of investment for fashion enthusiasts. Online fashion magazine CPP-Luxury lays out this example in one of their articles, pointing out how Hermes handbags are more expensive to buy second-hand: “A customer who pays $12,000 for a basic Birkin bag measuring 35 centimeters of calfskin in a boutique today could immediately sell it to a dealer for around $14,000” (2020). Of course, it’s not easy to obtain a Birkin to begin with, but the possibility of making a profit from a pre-owned one makes this investment exceptional.
Many consumers who are willing to invest in the luxury market will go as far as traveling to another country to get their hands on their favorite products. Chances are, even if you’re traveling internationally without the purpose of shopping, you’ll pass by luxury retail stores at least once. From Milan to Mumbai, luxury brands have physical locations in almost every country. This is due to the fact that brands recognize how profitable the travel industry is. As Vogue Business stated, luxury retail and travel “often move in tandem: when one booms, so does the other” (Ellewood, 2021). As tourists travel for indulgent experiences, luxury brands take note of this and provide unique travel experiences, such as limited-edition travel collections. Additionally, when consumers buy luxury products while traveling, they’ll most likely associate their purchases with the exciting memories from their trips, another way luxury retail brands capitalize on the aspirational nature of travel.
Conclusion
Luxury brands seem to thrive based on several factors, ranging from economic principles to psychological forces. The allure of luxury brands, despite their unreasonable prices, speaks to the complexity of consumers’ desires.
Works Cited
Dubois, D., Jung, S., & Ordabayeva, N. (2021, June). The psychology of luxury consumption. Current Opinion in Psychology, 39, 82-87. https://www.sciencedirect.com/science/article/abs/pii/S2352250X20301196#preview-section-cited-by
Ellwood, M. (2021, August 9). How the return of travel will impact luxury spend. Vogue Business. Retrieved August 11, 2023, from https://www.voguebusiness.com/consumers/how-the-return-of-travel-will-impact-luxury-spend?status=verified
Hermes Birkin Values Research Study. (2016, January 8). Baghunter. Retrieved August 11, 2023, from https://baghunter.com/pages/hermes-birkin-values-research-study
Should Hermès control the resale market? Birkin and Kelly handbags are more expensive to buy second-hand. (2020, March 1). CPP-LUXURY. Retrieved August 19, 2023, from https://cpp-luxury.com/should-hermes-control-the-resale-market-birkin-and-kelly-handbags-are-more-expensive-to-buy-second-hand/
Veblen Goods: Why Sports Cars and Diamonds Don’t Obey the Law of Demand. (2022, January 10). Michigan Journal of Economics. https://sites.lsa.umich.edu/mje/2022/01/10/veblen-goods-why-sports-cars-and-diamonds-dont-obey-the-law-of-demand/
