Monday, 23 January 2017

Birkin handbags and the signalling value of Veblen goods

I was recently interesting by this Brooke Unger article published in 1843 magazine last year, about the economics of Birkin handbags. The usual story about very high-end luxury goods (like Birkin handbags) is that they are Veblen goods - goods where the extremely high price is a signal of the high status of the purchaser. This conspicuous consumption can come in many forms. However, when it comes to Birkin handbags it turns out there is more to the story than simple conspicuous consumption:
So-called Veblen goods reverse the normal logic of economics. With most goods, demand falls as price rises; with Veblen goods, the higher the price, the higher the demand, for the more expensive they are, the more effectively they proclaim the status of their owners. The gap between the cost of producing a Birkin and the price tag suggests that it falls into this category.
Yet in a couple of ways, Birkins do not look like classic Veblen goods. First, they’re not all that conspicuous. Almost everyone can identify the provenance of Gucci’s double-G spangled Dionysus shoulder bag; only initiates can spot a Birkin. So Veblen’s theory needs to be adapted to explain the power of inconspicuous but expensive goods. The authors of “Signalling status with luxury goods: the role of brand prominence”, which appeared in the Journal of Marketing in 2010, do so by dividing the rich into two groups: “parvenus”, who want to associate themselves with other rich people and distinguish themselves from have-nots, and “patricians”, who want to signal to each other but not to the masses. They theorise that more expensive luxury goods, aimed at patricians, will have less obvious branding than cheaper ones. Sure enough, they found that Gucci and Louis Vuitton charge more for quieter handbags and Mercedes slaps bigger emblems on its cheaper cars. People who cannot afford luxury but want to look as if they can (“poseurs”) go for big logos: counterfeiters usually copy louder goods.
The interesting bit is that the luxury goods that people buy depend on to whom they want to send signals. Remember that a signal is only effective if it has two characteristics: (1) it is costly; and (2) it is costly in a way that makes it unattractive for those with 'low-quality' attributes to attempt. With a Birkin handbag, the first characteristic is assured. What about the second? One of the ways the second characteristic can be achieved is if it is more costly (in some way) for those with 'low-quality' attributes. Which brings me to this bit from the article:
You cannot walk into an Hermès boutique and expect to walk out with a violet ostrich 30cm bag with palladium hardware, or indeed a Birkin of any description. You have to place an order, and wait. Hélène Le Blanc, then a lawyer working in Paris, was initially rebuffed when she approached the flagship shop in Faubourg Saint-Honoré several years ago. Once she persuaded the saleswoman that she was serious, and willing to wait, she was presented with binders filled with leather samples and hardware options, and allowed to place an order...
In an episode of “Sex and the City” from 2001 Samantha jumps a five-year queue by claiming she wants the bag for actress Lucy Liu.
Yes, the second bit of that quote is fictional, but let's say for argument's sake that celebrities and other sought-after clientele don't have to wait as long to get a bag. The time spent waiting is part of the cost, so if you are an average Jane wanting a Birkin bag, then the waiting time will be longer (and hence the cost for Jane will be higher than for a celebrity).

This bit also struck me:
But as Solca observes, there are good commercial reasons why rationing by queue rather than price can make sense. First, it gives Hermès a buffer: even if demand drops, sales will not. Second, it creates surplus demand for the bags, which overflows into demand for other Hermès products. Much of the firm’s business consists of selling consolation prizes: wallets, belts, beach towels and so on. As J.N. Kapferer of the Inseec Luxury Institute in Paris observes, the wait induces “impatient buyers to switch to other products of the brand, to calm their hunger until the much-awaited object of desire is achieved.”
In ECON100, we talk about selling complementary goods as a way of capturing value and increasing profits, and this is another example of that. Again, the unwillingness to wait for the handbag (and instead buying a belt or beach towel) further demonstrates the signalling value of the handbag itself.

[HT: Marginal Revolution]

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