Luxury goods have a high level of income elasticity and are classified as Veblen goods. The latter implies that for luxury goods, people associate price with quality, and hence their preference for buying such goods increases as a direct function of price. Handbags, luxury cars, high-end watches are some examples of luxury goods.
Globally, the economics of luxury goods has been changing rapidly, especially since the crisis. The growth in the digital and online market, increased IP protection, new royalty rules and the shift in consumer demand toward more ‘usable’ goods have all be transforming the luxury goods industry.
The most obvious change however, has come from the shift of luxury market from the developed countries in North America and Western Europe, to emerging economies. According to a study by Bain & Co., while US, the world’s largest luxury market, is expected to grow by 8% to about 52bn euros in 2011, China is expected to see close to 25% year-on-year growth. At this pace growth, Greater China (including Taiwan, Macau and Hong Kong) is expected overtake Japan as the world’s 2nd largest market for luxury goods by the end of this year.
This increased penetration of luxury goods in emerging economies has interesting socio-economic implications. As the Veblen good classification makes clear, luxury goods are meant primarily for conspicuous consumption or more simply to ‘show-off’.
In developing countries, where there is stark and growing gap between the rich and the poor, this may breed social unrest.
This has particularly come to light due to recent reports about the elite in North Korea flouting the ban on import of luxury goods. According to South Korean officials, while the food shortage-ridden North Korea spent $ 46 million on importing food staples, it also spent $10 million on luxury goods between the January to May of this year. The ban was imposed by the UN in light of the extensive food aid guaranteed to North Korea.
In a somewhat similar measure, in May this year, Chinese officials, in their words, concerned about growing ‘hedonism’ within the country, banned any advertisements highlighting lavishness and aristocratic lifestyles.
Indeed, such measures raise questions about whether other countries in the world, which suffer from stark income inequalities, should pose similar restrictions.
To answer this we need to address fundamental questions about human rights, ways to achieve social equality and responsibility of the elite towards society. While these are all matters of lengthy debate, we urge that you give this some thought before you head out to purchase your next Jimmy Choo or LV!
In our next post, we shall look more closely at the luxury goods industry in India and understand where that’s headed..do keep a look!
Though the market for luxury in India is still at a nascent stage, the market in general being saturated by modestly priced- indigenous products, with recent spurt in growth(8%-9%) and also the rising disposable incomes, more and more forei...gn luxury brands are flocking in, all to be part of the successful growth story. It is to be seen whether the high-spending consumers giving in to the lure of such prove to be detrimental in the long run in broadening the already widened income gap in the country. In view of such a situation, policy initiatives in controlling influx of luxury brands, even at this nascent stage, should be considered imperative.
ReplyDeleteThanks for the comment Anua! While i agree to the fact that measures to reduce the income gap need to be taken, am not sure, if raising import duties luxury goods is the way out of it, cause the rich will some way or the other find a way to spend-jewelery et al. But yes, it is likely to have some impact!
ReplyDeleteshow off is not only limited to the elites, even the poor tend to showoff within their constraints. it is a common phenomenon.
ReplyDeletealso it is wrong to say that responsibility towards society is getting undermined, luxuries are heavily taxed and its the poor who will be benefiting i guess
Thanks for the comment! I agree that luxury goods are heavily taxed+ it adds to the economy, and hence it is difficult to really whether they do have a net positive impact on the society or not. It's a question I am still pondering on and just wanted to leave some food for thought!
ReplyDelete