There’s no denying the over-the-top flavor of much high-end consumption these days. A Reinast toothbrush,
of solid platinum, sells for $4,200 even though it may not get your
teeth any cleaner than a $2 toothbrush from Walgreens. Then there’s the Greubel Forsey Double Tourbillon 30° Technique,
a platinum wristwatch that sells for scores of thousands of dollars.
Its intricate mechanical works may be a masterpiece of traditional
engineering, but for that, you might keep your day-to-day appointments
just as well with a $40 Timex.
Buyers
of these products have plenty of money, of course. But are they
different from the rest of us in other ways? It’s an important question.
Because income growth in recent decades has been so heavily
concentrated at the very top, luxury markets have become the biggest
drivers of economic activity around the world. To understand these
markets, we must first understand the motives of the customers they
serve, and it’s here that many analysts have stumbled.
One
common claim is that the wealthy routinely violate the economist’s law
of demand. A bedrock principle of economic rationality, this law holds
that as the price of a good rises, consumers buy less of it. Many
analysts, however, portray the rich as people who lust after what are known as “Veblen goods” — commodities whose sales actually increase when their prices rise.
The
term was inspired by the economist Thorstein Veblen, who interpreted
much consumption by the rich as an attempt to signal their great wealth
to others. In his view, the lavish summer mansions of 19th-century
industrialists in Newport, R.I., were valued less for their own sake
than for the fact that they marked their owners as people of wealth and
power.
Yet
wealth-signaling is probably less important than Veblen thought. Rich
people buy luxury goods for many reasons, but even those seeking to
display their wealth can almost always find efficient ways of doing so.
Why buy a gratuitously expensive good when you can signal your riches
just as effectively with an equally expensive good that you actually
like? To be sure, billionaires are often willing to spend enormous sums
for beautiful things that can’t be duplicated at low cost. But almost
none of them would want to buy more of something simply because its
price had risen.
If
they were merely chasing Veblen goods, the rich would be easily
exploited by the purveyors of luxury items. Yet the markets for these
goods are among the most bitterly contested, and not just because the
stakes are so high. Thousands of wine producers spend small fortunes
trying to achieve 96-point Robert Parker ratings, but very few get them.
The
disruptions that have occurred in the luxury car market also cast doubt
on the Veblen-goods concept. Throughout the 1980s, for example, BMW and
Mercedes-Benz were leaders in the market for sedans costing up to about $70,000. But wealthy motorists eventually found more choices when respected reviewers assured them that the Toyota brand Lexus offered a better car in many respects.
If
BMW and Mercedes sedans had been Veblen goods, their producers could
have responded to the Lexus challenge by simply raising their prices. In
fact, they have managed to prosper by getting costs under control and
making their cars much more appealing.
The
rich, of course, are willing to spend more, often a lot more, for
products that deliver quality improvements they value. But few of them
want to throw money away. In that respect, they’re like middle-income
Americans, many of whom don’t feel especially prosperous these days. Yet
relative both to current world standards and to living standards of the
past, middle-income Americans are incredibly wealthy. And when viewed
from the perspective of those standards, much of their current
consumption is strikingly similar to that of today’s rich.
Each
day, for instance, many of us consume espresso brews priced at what
would be almost a week’s wages in other parts of the world. We’d be
offended if someone described these purchases as attempts to display our
wealth. And we’d be puzzled if someone said we’d buy even more lattes
if our favorite cafe were to raise its prices. The coffee just tastes
better, we’d say, and we’re willing to pay a premium for that.
Luxury
markets are already important, and with inequality poised to grow
further, these markets will become ever more so. Those who fail to
understand them cannot hope to understand what drives the world economy.
That
goal will remain elusive until we recognize that the wealthy are
essentially similar to the rest of us. They just have a lot more money.
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