Luxury Good Demand eScholarship@BC 2023-03-27

Brand loyalty and perceived value in luxury goods are multifaceted constructs shaped by emotional, social, economic, and experiential factors. While the law of demand generally holds true across markets, luxury goods operate within a niche that often sees traditional economic principles inverted. The allure of luxury is not merely in the product itself, but in the story it tells and the identity it confers upon its owner. As such, the dynamics of demand for luxury goods remain a complex and evolving area of study, reflecting the nuanced interplay between economics, psychology, and society.

Understanding Cross Elasticity of Demand for Luxury Items

Some financial services, especially in some brokerage houses, can be considered luxury services by default because persons in lower-income brackets generally do not use them. A luxury good can be identified by comparing the demand for the good at one point in time against the demand for the good at a different time, at a different income level. When personal income increases, demand for luxury goods increases even more than income does. Finally, our analysis reveals that the type of crisis significantly influences how clients perceive quiet versus loud luxury.

Trends

• They need to understand the income level and preferences of their target market, and how they respond to changes in the price of other goods and services.
• When the price of luxury cars increases, it is likely to impact the demand for high-end watches, as consumers may choose to allocate their discretionary income towards the more expensive vehicle.
• The brands that will emerge stronger are those that view adaptation and resilience not as burdens but as catalysts for innovation and reinvention.
• Therefore, the strategies employed must resonate on a deeper level, aligning with the values and aspirations of the target audience.
• Since it’s essential to understand the concept for companies, this blog will focus on the price elasticity of demand examples.
• On the other hand, some luxury goods exhibit a complementary relationship, meaning that changes in the price of one luxury item impact the demand for another luxury item positively.

In the realm of economics, price sensitivity is a measure of how the demand for a product changes in response to a change in its price. This is known as price elasticity of demand, and it’s a fundamental concept for understanding consumer behavior. However, luxury goods often defy this traditional model, exhibiting what is termed as 'inelastic’ demand. The allure of luxury goods lies not just in their quality or functionality, but in the prestige they confer upon their owners. They are seen as status symbols, and owning them signifies a certain level of wealth and social standing.

• In recent years, the landscape of social entrepreneurship has witnessed a significant shift with…
• Exploring the concept of elasticity in economics provides valuable insights into consumer behavior and market dynamics, particularly within the realm of luxury goods.
• They may also emphasize the functional and utilitarian aspects of their luxury items, to appeal to the consumers’ need for quality and performance, and to justify their purchase.
• First, we observe a clear preference for quiet luxury over loud luxury during times of crisis.
• Therefore, the impact of competing brands on price elasticity is not just a matter of economics but also of brand perception and consumer psychology.
• Conversely, a PED less than 1 denotes inelastic demand, where quantity demanded is relatively unresponsive to price changes.

What is elasticity of a product?

A negative cross elasticity of demand means that the goods or services are complements, meaning that they are used together or in conjunction with each other. The cross elasticity of demand for luxury items depends on the income level of the consumers and the nature of the other goods or services. For example, as income increases, consumers may switch from buying cheap fast food to buying expensive gourmet food, or from luxury goods elasticity buying second-hand clothes to buying designer clothes.

Luxury goods: Understanding Cross Elasticity of Demand for Luxury Items

For instance, imagine a newly prosperous middle-class family that has recently experienced a significant increase in income. They may decide to celebrate by purchasing a luxury car or designer clothing, as a way to showcase their newfound wealth and social status. Luxury goods are in contrast to necessity goods, where demand increases proportionally less than income.1 Luxury goods is often used synonymously with superior goods. As crises become an increasing feature of the global landscape, understanding these nuanced shifts in client attitudes will be essential for maintaining relevance in the ever-evolving luxury market.

They may also emphasize the functional and utilitarian aspects of their luxury items, to appeal to the consumers’ need for quality and performance, and to justify their purchase. While luxury goods exhibit a degree of price inelasticity due to their exclusivity, various factors can influence this elasticity. The luxury market is not monolithic, and different products and consumer groups can show varying levels of sensitivity to price changes. Understanding these nuances is crucial for luxury brands as they navigate pricing strategies and market positioning. The luxury goods sector, therefore, presents a unique case study in the application of economic principles to real-world consumer behavior and market trends. In the realm of luxury goods, the interplay between competing brands and price elasticity presents a fascinating dynamic that is both complex and intriguing.

Luxury leaders will need to conduct a holistic, strategic reset and play the long game, rather than rely on quick fixes to address their most pressing challenges. The most common goods with inelastic demand are utilities, prescription drugs, and tobacco products. In general, necessities and medical treatments tend to be inelastic, while luxury goods tend to be most elastic. The moment you raise your price even just a little, the quantity demanded will decrease. Examples of perfectly elastic products are luxury products such as jewels, gold, and high-end cars.

Celebrity influence on luxury goods

As consumers become more conscientious, luxury brands must adapt to remain relevant and desirable in a market that now demands more than just opulence. It’s a complex dance of maintaining allure while embracing responsibility, and the brands that do this well will likely lead the future of luxury. Through these examples, it’s evident that luxury brands are not just indulging in tokenistic gestures but are making significant strides in integrating sustainability and ethics into their core business strategies. As this trend continues, luxury goods may well redefine what it means to be a necessity in the modern world, where indulgence is no longer at odds with responsibility.