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Pumped Up Kicks: What is Happening to the Prices of Luxury Goods?

By Konstantinos Paschalis, Economics Correspondent


As holiday shopping came and went, consumers flocked to luxury houses like Dior, Gucci and Prada for their annual splurge. But some of them might have noticed unusually high prices. And they would be correct. In the US, gross inflation reached 16.57% when considered cumulatively since 2019, whilst the average prices of luxury fashion brands have risen by 25%. [1]

Luxury stores capitalising on the holiday season


Economists have long been wondering why luxury goods charge a large mark-up in the first place. In the 18th century in “The Wealth of Nations”, comparing the prices of water and diamonds, Adam Smith considered why the former is practically free but is essential for human survival and the latter is expensive but not as useful.[2] Although Smith never provided a concrete answer to this question he called the “water-diamond paradox,” one arrived in the 19th century, when William Jevons suggested that it came down to the fact that one additional unit of diamonds provided more utility than one additional unit of water.[3]


Later in the 19th century, Jevons’ marginal analysis seemed too vague since it would be impossible to ascertain utility due to the subjectivity of each individual. Inspired by this inconsistency, Thorstein Veblen provided a considerably more refined perspective, explaining that the consumption of luxury goods is conspicuous. It entails that luxury goods are consumed for the consumer to be seen by other members of society in order to achieve higher social status.[4]

Veblen’s theory echoes even today. While income inequality widens globally, revenues of luxury houses have risen. As the affluent lifestyle of the mega-rich becomes more romanticised, more consumers want to show that they belong in the top ranks of the income percentiles. This creates opportunities for luxury brands, who besides from earning more brand loyalty in the process, can also easily raise prices to earn more revenue due to price inelastic demand.


These aspirations to look rich, however, are shunned in certain countries. In early 2022, the Financial Times reported that China's policy of cracking down on high incomes and celebrity culture is poised to create significant uncertainties in navigating the country’s regulatory landscape for luxury fashion houses.[5] Since brands are losing access to the market where 40-50% of their revenue is being made,[6] it is only rational that prices are raised in other parts of the world to make up for lost income.


Moreover, these compounding factors are not only on the demand side. The past year saw prices of raw materials such as cotton soar due to disasters in producer countries. It was estimated that the floods in September 2022 in Pakistan swept away over 45% of the country’s cotton crops.[7] And raw material supply is not expected to completely keep up with demand anytime soon, given the recent boom in the consumption of luxury goods as consumers spend their pent up income from the pandemic.[8] So as material costs rise, a rise in price follows, since the increase is usually passed down to the consumer.

Ultimately though, the most significant factor is changing consumer tastes. As the average shopper of luxury goods is getting younger and cares more about the exclusivity and “hype” of the good rather than the fine craftsmanship demanded by the older generation, brands are quick to jump on the trend. It encourages them to limit releases of their goods to make them harder to come by, hence explaining the higher prices.

And younger age groups are biting. “We like anything with the Harrods name on it,” said two young shoppers walking down New Bond Street to The Guardian in an interview in November.[9] This affection can be noticed not only by the minimal time new releases take to sell out, but also by the exorbitant prices the same goods fetch on resale markets, which have been valued at between $25-30 billion by McKinsey & Company.[10]

“We like anything with the Harrods name on it”

The next question on shoppers’ minds might be whether this price rise will be persistent. This article’s opinion is yes. Our obsession with making statements about our wealth is nothing new, but social media, which amplifies the need to keep up with new trends, can elevate this addiction to new heights, making luxury goods such as clothes and handbags more perishable as fashions change more quickly. As these large houses effectively determine fashion through advertising, they can make consumers shop more frequently and at higher prices, skyrocketing revenues.


And this can have further consequences. As young consumers are chasing luxury goods to show off their “clout,” it could lead to a polarised society where social norms make have-nots spend outside of their means to look like the haves. This might encourage low income individuals to save less which could make them more vulnerable during times of recession.


Forms of irresponsible consumption like these are not exactly great for the environment either. From the production stage, the raw materials fashion houses use carry a high carbon footprint as in the case cotton and leather. Their disposal is no better, given that globally just 1% of textiles are recycled according to the European Parliament.[11]


Therefore, for the benefit of the planet, and our pockets of course, it might be a good idea to let a little air out of the pumped up trend of chasing hyped releases, which allows fashion houses to hike up price premiums for their goods.

 

References

[2] “The Wealth of Nations” Smith, Adam 1776 [3] “The Theory of Political Economy” Jevons, William 1871 [4] “The Theory of the Leisure Class” Veblen, Thorstein 1899

[5] “Xi Jinping’s call for wealth redistribution threatens luxury groups’ China boom” https://www.ft.com/content/4cf59a34-cd03-48a1-b5d0-0c71922ef9b3 [6] China Recalibrated: Why Luxury Must Consider Changing its Global Game” https://jingdaily.com/china-global-revenue-structure/#:~:text=For%20many%20luxury%20brands%20the,far%20their%20number%20one%20market.

[7]“Flooding in Pakistan: What Repercussions for the Textile Industry?” https://pciaw.org/flooding-in-pakistan-what-repercussions-for-the-textile-industry/#:~:text=Pakistani%20media%20have%20estimated%20that,swept%20away%20by%20the%20flooding. [8] “The pandemic and the booming luxury industry” https://www.trtworld.com/magazine/the-pandemic-and-the-booming-luxury-industry-53890

[9]“We like anything with the Harrods name on it: Luxury brands report booming sales” https://www.theguardian.com/business/2022/nov/18/sales-jumps-and-plunging-champagne-stocks-despite-crisis-luxury-is-booming [10] “Welcome to luxury fashion resale: Discerning consumers beckon to brands” https://www.mckinsey.com/industries/retail/our-insights/welcome-to-luxury-fashion-resale-discerning-customers-beckon-to-brands


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