Aspects of the Market for Luxury Goods: The Economics Literature
Economists have considered the characteristics of luxury goods consumption behavior at least since the classic work of Thorstein Veblen, The Theory of the Leisure Class, first published in 1899. Indeed, Veblen's characterization, conspicuous consumption, which he used to describe the acquisition of expensive goods and services for the purpose of signaling status and wealth, has become a standard part of the economic and marketing vocabulary. Veblen's colorful phraseology such as "pecuniary emulation" and "invidious comparison" helped to highlight certain behavioral characteristics albeit with more than a hint of opprobrium. A critical aspect of conspicuous consumption was that the consumption was of nonnecessities.
Snob and Bandwagon effects
One half-century later, Leibenstein (1950) codified the Veblen Effect to describe a positive relationship between price and quantity demanded in the market for high-status goods, the opposite of what would be expected in traditional demand theory. Leibenstein also went on to describe the "snob" and the "bandwagon" effects. The former is a decrease in the preference for a good as the number of persons buying it increases while the latter reflects an increased preference for a good relative to the number of buyers of that good.
In general, microeconomic demand models would clearly focus on income and wealth as the critical variables in the consumption of luxury goods, goods that are usually both demand inelastic and income elastic; however, from Veblen through Leibenstein, it is obvious that other factors, more difficult to measure, are also at work. Certainly, conspicuous consumption, snob appeal, and bandwagon effects direct our attention to buying motivations that are more subjective than those associated purely with income and wealth.
The role of conspicuous consumption in signaling status led to the development of signaling models. Corneo and Jeanne (1997) acknowledge that literature and examine snob and bandwagon effects further. They establish two types of incentives for conspicuous consumption, namely, the desire not to be identified with the poor and the desire to be identified with the rich. If the first incentive prevails, a bandwagon effect follows while the second incentive gives rise to the snob effect. Their study confirms the existence of the Veblen Effect when the status signaling value of a purchase increases with the price of the product or service. In this situation, the price of the good signals the quality of the consumer rather that the quality of the good, a finding with useful marketing implications.
Luxury and Non-Necessities
Kemp revisited the luxury versus necessity issue in a 1998 paper based upon three surveys of New Zealand consumers. He found that consumers rated a good or service as more luxurious if it was the object of desire rather than something to relieve a state of disutility. Luxury was inversely related to utility as Veblen and others had observed. Kemp also found that his sample of New Zealanders had inelastic demand for items they perceived as luxuries compared to those perceived as necessities. Twitchell (2002) similarly addresses the "unnecessary" aspects of luxury goods.
As the income and wealth effects of economic development were reestablished and diffused after World War II, the market for luxury goods increasingly drew the attention of a select group of specialty producers. This led to a further scrutiny of luxury goods consumption so as to develop more focused marketing strategies to this segment.
Aspects of the Market for Luxury Goods: The Marketing Literature
Luxury, Income, and Culture
The applied marketing literature puts the spotlight on culture as a demand factor that deserves more serious attention. As Dubois and Duquesne (1993) observe, the empirical measurement of culture and its impact on luxury goods demand is not easy task. …