Luxury goods economics focuses on how consumer trends shape people’s purchasing patterns in various economies, as well as whether or not the prices of certain luxury goods fluctuate over time and impact overall economic development.
Luxury goods typically stand for superior quality and craftsmanship, often sold with distinctive packaging to distinguish themselves from mainstream competitors and frequently more costly than their lower-priced alternatives.
Luxury goods are distinguished from cheaper options by their extravagant features such as hotels or yachts with unique characteristics, more durable construction or superior customer service. In addition, their prices often reflect this distinction as well.
Luxury goods attract consumers due to their aesthetic features that make them desirable and appealing, setting them apart from less costly options such as clothing and furniture that average consumers can purchase at retail outlets. These features also serve to differentiate luxury goods from their less costly alternatives like clothing or furniture found at regular stores.
Luxury purchases are highly sensitive to changes in the economic environment, such as income decreases or price hikes for goods and services. When times get hard economically, people often cut back spending, especially non-essential goods and services – this reduces how much money is available to spend on luxuries.
During the global pandemic, many people lost their jobs and were no longer able to purchase luxury goods, having an immense economic repercussion that saw demand for these items decline substantially across nearly every economy.
Longer term, however, luxury brands should not find this trend alarming; it is only one among many occurring in the market and can easily be tailored by luxury brands to reflect their brand identity, product category and customer preferences.
Luxury Goods and Economic Inequality
A luxury good is any non-essential item purchased to increase one’s standard of living. These goods tend to be purchased by people with higher incomes as a display of wealth and prestige.
These luxury goods and services may include luxury automobiles, jewelry, designer handbags, exclusive fashion apparel or luxurious services such as hiring full-time or live-in domestic servants or financial brokerage houses that offer stock options.
Due to this, these goods are extremely sensitive to changes in people’s incomes, demonstrating high income elasticity of demand – that is, as people’s incomes increase, their desire for these goods increases significantly.
Veblen goods
Veblen goods, or luxury items that are popular due to their excessively priced nature, are known as Veblen goods and contribute to what is known as the Veblen effect, named for Norwegian-American sociologist Thorstein Bunde Veblen.
Veblen goods, or luxury items that defy economic laws of supply and demand, such as wine, certain brand watches, designer handbags and luxury cars, fall under this definition. For instance, their prices reflect their true value to their owners rather than reflecting market forces of supply and demand. Examples include wine, brand watches, designer handbags and luxury cars that fall into this category.
Veblen goods are luxurious items which have become status symbols due to their extravagantly priced nature, such as jewelry and wine purchases as well as brand watch purchases. This trend is particularly evident among certain types of luxury watch brands.
