Is spending money behind luxury goods worth it
Have you ever wondered why people are attracted to highly prized goods like Hermes bags, Louis Vuitton clothing, rare wines or Rolex watches despite their high price tags?
Normally, the lower a good is priced, the more demand there is for it. With Veblen Goods, the higher their prices, the more popular they become.
(Photo: Wikimedia, Left: American economist Thorstein Veblen 1857-1929, Right: Veblen Demand Graph)
So why does this occur? Of course, higher priced products provide better quality and are accompanied with better service. Louis Vuitton, Hermes and Chanel purses, for example, are crafted with the finest materials and carry lifetime warranties. For most products, the rise of a price is initially accompanied with significant increases in quality.
When purchasing something as simple as a chair, it might cost $5 at a yard sale. It may be heavily used, have unseen flaws, or have other issues such as the chair being uncomfortable, or visibly unappealing. On the other hand, a $50 chair from Canadian Tire, apart from being new, might be strong, durable, comfortable, and have features like extra cup holders for those hot summer outings. For almost all consumers, this meaningful difference in quality would make this decision hard. Since the quality: price ratios between the two options are roughly the same, an individual might struggle to decide between the creeker and the recliner.
According to Veblen, the cheapest option will give you the most “bang for the buck”, or the highest quality: price ratio. As the price of a good increases, increases in “prestige” will begin to outpace quality increases. In this case, prestige refers to a feeling of accomplishment one gets from achieving a goal few can reach. In sports, to win a large tournament or even one’s own record is a cause for celebration. For many, to drive a Rolls-Royce or to sip Hennessy is as much about “treating yourself” as it is about quality. Veblen continues to expand upon this by noting that the more exclusive a good is, the more people will seek it. It is this imbalance that drives up the price.
In fact, many luxury goods retailers face the risk of becoming too common. British fashion icon Burberry, for instance, had to restrict its sales locations in the early 2000’s to maintain its Veblen effect (Limestone Capital, 2020). For all luxury goods retailers, price-points rest on belief, which in turn rests on quality as a starting point. As such, luxury retailers must provide excellent quality as a basis for belief in order to grow.
As Canadians accumulate historic levels of wealth over the course of the pandemic, many luxury brands will be keen to protect their Veblen effects from over-purchasing. Like inflation, the more there is of a luxury good, the less demand there will be for it in the future.