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            Luxury goods make up a massive percentage of consumer expenditure. Something that is only accessible to the world’s elite, including everything from diamond jewelry, leather handbags, silk clothing, to perfume and makeup totaled to $212 billion dollars in 2017 (Arienti “Global Powers of Luxury Goods 2017”). This is a large part of the country’s total expenditures in 2017, which were around $6.64 trillion dollars total (“How Much Is Government Spending Changing?”). According to economics, a luxury item is defined as a product that increases in demand as income increases (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”). When income rises, people will spend a higher percentage of their income on a luxury good (Pettinger, “Different Types of Goods – Inferior, Normal, Luxury”). In other words, a good that may be desirable, but not exactly necessary. A luxury good is unlike a normal good in the sense that as income becomes bigger, there is a bigger percentage increase in demand. Luxury items tend to have higher income elasticity because when people have higher incomes, they don’t have to give up a big percentage of their income to buy these luxury goods (Hayes, “Economics Basics: Elasticity”).

The United States is the leading luxury goods market and it is expected to stay this way for the next few years (Arienti “Global Powers of Luxury Goods 2017”). Luxury goods seemed to be headed on an economic downturn following the 2008 crisis, but with the current rise of the worldwide economy, sales have begun to increase again (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”).  The compound annual growth rate in luxury goods sales has been 5.2% (Arienti “Global Powers of Luxury Goods 2017”).

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            Sales in the luxury market have the tendency to remain steady, stable, and consistent through most economic times due to the fact that the luxury consumers will always have the money to spend, regardless of the fact that others may not (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”).  It is a very real possibility that the consistency of the luxury good market can actually help the rest of the economy. Luxury goods give suppliers a reason to stay afloat while the economy for normal or inferior goods may suffer (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”). The super-rich are able to spend money when the rest of the economy of down, ultimately helping the overall health of the worldwide economy (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”). This stays consistent with the fact that the top one percent of the population’s income growth rate has been increasing faster than the rest of the population’s. An increase in income for the rich is the reason that the luxury good market is possible and bombing. Without the rich getting richer, the million dollar necklaces and hundred thousand dollar purses just would not sell (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”).    

            In the last five years, people’s inclination towards purchasing luxury products has dramatically increased. In February of 2017, 1,300 luxury consumers were interviewed regarding their behavior toward luxury goods and their habits with spending. Of those 1,300 people, only four percent reported that they had cut back on spending in the luxury market, while a majority, 59%, said they had increased their purchasing behaviors (Arienti “Global Powers of Luxury Goods 2017”).  Even in the last twelve months alone, an increase in purchasing luxury goods has been observed (Arienti “Global Powers of Luxury Goods 2017”). So what exactly is the motivation behind spending the price of a car on a pair of Valentino sunglasses, or a pair or sky-high diamond incrusted Louboutin heels? Robert Frank hits it on the nose when he brings it to attention that American’s have definitely come down with luxury fever: “In short both the things we feel we need and the things available for us to buy depend largely—beyond some point, almost entirely—on the things that others choose to buy” (Frank, “Weighing the Cost of Excess”). 

            The demand trend for luxury goods just does not really make sense. A rational shopper should be buying the cheaper variety of the goods, especially because there is only a very small difference in quality when comparing mediocre brands to full out, high end luxury brands (Rajadhyaksha, The Curious Economics of Luxury Brands”). Many blind taste experiments show that even well-trained wine connoisseurs are sometimes incapable of discerning between a “good” wine and a mediocre one (Rajadhyaksha, The Curious Economics of Luxury Brands”), the same applies to the luxury good market. A common answer to the question of why people buy these unnecessary goods is something that economists call “signaling”. This is also known as “status consumption”. Status consumption is defined as the “acquisition of products by consumers for the value of “status” that they may provide” (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”).  Luxury goods are the epitome of products labeled “high status”. These high-status products are defined as products that, “when used or consumed in the presence of others, make others think more positively of the user” (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”).  Adam Smith uses the example of a linen shirt that a laborer wears to attempt an explanation of why people spend money on things not considered a necessity: “A linen shirt…is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct,” (Smith, “An Enquiry Into The Nature And Causes of The Wealth of Nations”). According to the Forbes Cost of Living Extremely Well Index, the modern-day equivalent of that linen shirt are a pair of Gucci loafers, one year at Harvard University, a night at a one-bedroom suite at the Four Seasons in New York, Joy (a perfume by Jean Patou), Davidoff cigars, an Hermès calfskin bag, and a dozen Turnbull & Asser shirts (Rajadhyaksha, The Curious Economics of Luxury Brands”). The Forbes list is a major indication that exclusivity is still very much prominent and that what really matters today is not the category, but the brand, not the linen shirt, but what brand the shirt was. The driving force that motivates consumers to practice status consumption has been pinned down to basic human motivations, societal group motivations, international motivations, and culture based motivations (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”).

There were two main interconnected trends in 2017 that were believed to have contributed to the growth and characterized the market of luxury. The first trend is “standardization to personalization”. In past years, the sales strategy to entice the purchase of luxury goods has been more of a “one size fits all” approach. However, now it is making a shift to prove the shopper with a more individualized and personal experience (Arienti “Global Powers of Luxury Goods 2017”).  Consumer expectations are changing. Consumers are asking for home deliveries, more rewards for their loyalties, and more personalized products and services (Arienti “Global Powers of Luxury Goods 2017”). Eighty-two percent of people surveyed in the Deloitte Luxury Multicountry Survey for Global Powers of Luxury Goods 2017, say they buy luxury goods because “When I buy a luxury product I feel happy and confident” (Arienti “Global Powers of Luxury Goods 2017”). During the entire survey, more than fifty percent of luxury consumers said they are conscious that they buy luxury products simply for the status that comes with the possession of certain goods (Arienti “Global Powers of Luxury Goods 2017”). Fifty-six percent of consumers even said they simply buy luxury goods because they like to show them off (Arienti “Global Powers of Luxury Goods 2017″).  People like to buy expensive goods for their own personal satisfaction and to tell the world who they are (Rajadhyaksha, The Curious Economics of Luxury Brands”). The bottom line is, people are spending billions of dollars on tediously unnecessary goods because, well, it makes them feel nice. 

             The second trend is “changing products from physical products to the digital experiential”. It is thought that luxury goods made a shift from the actual physical good, to the way that the good makes you feel (Arienti “Global Powers of Luxury Goods 2017”). There is some instability regarding this trend in projecting out in years to come. A major enticement for buying luxury goods is the keen eye for craftsmanship and handmade products. But with the emergence of more and more artificial intelligence and digitalized production, the luxury market could potentially be in trouble in years to come. Companies producing these luxury goods are in for a massive challenge as they are figuring out ways of using digital technology without losing their focus and tradition of well made, handmade, and handcrafted goods (Arienti “Global Powers of Luxury Goods 2017”). Some attempts made at incorporating luxury with practical without losing that excludability and heritage can be seen in the Hermes band on the AppleWatch. So how are the luxury markets going to adapt to the digital age without leaving behind their all-important vow to quality, and without getting left behind by everything technical? In the Deloitte Luxury Multicountry Survey for Global Powers of Luxury Goods 2017, it was found that the majority of consumers (about 61%) believe that the luxury sector is destined to be disrupted as digital technologies are adapted (artificial intelligence, robotics, virtual reality, and 3D printing) (Arienti “Global Powers of Luxury Goods 2017”). Consumers are concerned that with the adaptation of current technologies, the exclusiveness of the “one of a kind bag” that they desire, may be in trouble because the availability of these goods may skyrocket. As these goods become more readily accessible to the common man, the impact of high status that owning the goods decreases. This has the potential to seriously hurt the luxury markets.

            The luxury good market has given way to an unexpected sector: the counterfeit good market. Because of the massive demand for luxury goods, and the massive excludability the prices demand, the counterfeit market has been born. These counterfeit companies offer almost identical replicas of these exclusive luxury brands for a fraction of the cost (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”). These fake “luxury” goods are illegal and low priced (Chen, “Social Behavior and Personality: An International Journal”). The primary consumers of counterfeit luxury goods are people with a desire for the status that comes with owning luxury goods, but cannot afford the genuine, prominent brand. These branded counterfeits are bought so that consumers can pretend to be wealthy (Chen, “Social Behavior and Personality: An International Journal”). In the past, they have had the reputation of being cheap and low-quality replicas, but recently the counterfeit market has increased in quality and availability. Counterfeits are mainly coming from Italy and they are becoming harder and harder to combat These counterfeits used to easily fall part and lose color quickly or after they are washed. Recently, the quality of fakes has dramatically improved and there are even incidents where the fake goods are actually produced by the same manufacturer as the real original items. In this case, the products are indistinguishable even when sold for more than half the original cost (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”).  People are purchasing these counterfeits for their symbolic value in hopes to enhance and improve their social status (Chen, “Social Behavior and Personality: An International Journal”). The unexpected emergence of this sister market to the luxury product world has had some surprisingly beneficial effects on the economy. The market has a distinct impact on the suppliers and producers responsible for making goods. Counterfeiting affects the suppliers because the suppliers get to manufacture more products that they would by just supplying to the luxury brands. Suppliers produce and sell more, which entail leads to larger profits (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”). This untimely helps the economy. The counterfeit market is also a place that requires a middleman, someone to buy goods from the manufacturer and sell them to the people (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”). People have the opportunity to make living by selling a massive amount of counterfeit goods and employing people who would have otherwise been searching for jobs. The counterfeit market does its part in lowering the unemployment rate and boosting the GDP. There are also downsides to the counterfeit market. Industries often find themselves in direct competition with counterfeiters which can cause a loss in sales for the real deal luxury brands (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”). The sales of counterfeit goods have caused the legitimate luxury goods producers billions of dollars in sales (Chen, “Social Behavior and Personality: An International Journal”). There are also the inevitable missed sales and very often there are lost tax revenues (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”). A “loss of goodwill” is sometimes observed when consumers believe they have a genuine product when in reality they purchased a fake product and the manufacturer gets blamed for the poor quality (Rhee, “A Study on Why Luxury Goods Sell and Their Effects on the Economy”).

                While in many cases, luxury goods offer no clear important benefits for their high price, there are many psychological and economic factors that go into the decisions of purchasing luxury goods. This is clear based on the growing rate of the market and the increase in purchasing behavior of the buyers. There has to be an explanation for the consumption of gold toilets, thousand-dollar silk scarves, diamond encrusted sunglasses and five-digit leather bags. Status consumption is a major influence on the how and why the super-rich spends their money. The way that the upper class wants to spend their money is changing, they want more personalization and more attention paid to craftsmanship and quality. The luxury good market is going through changes as well, in attempt to figure out how to incorporate modern digital ideas and technology while maintaining the tradition of well made, craft products. Simply the longing and desire to be considered high status and wealthy has given birth to the counterfeit market, which has an equally positive effect on the economy. As for as the real deal spending goes, the excessive spending is many times frowned upon by the lower and middle class, the upper class and their massive spending habits many times offer serious economic benefits to the rest of the worldwide economy, and for that, we owe them a ‘thank you’.





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