Why does a $7,000 Louis Vuitton bag create more demand than a $70 bag you can buy on Amazon? According to the law of demand, which states that the demand for the product is inversely proportional to the price of the product, demand should decrease as the price increases. However, the demand for luxury goods is a fascinating exception to the law as the demand, in many cases, increases as price increases, a phenomenon known as the Veblen effect. This effect elucidates how status drives demand along with utility. Luxury goods defy demand laws because their value lies in status as well as practicality, which leads to higher prices becoming desirable rather than discouraging.
A concept tied most closely to the reason for this trend is the price elasticity of demand. Demand for luxury goods is inelastic, which means that it does not change much with change in price. Often, as prices increase, goods become more desirable because we live in a society where people are eager to show their wealth. For example, imagine someone buying tickets to their favorite artist’s concert. They can buy standing tickets, standard seated tickets or VIP seats which allow them to see the show right from the front. The music is the same regardless of which ticket they buy, but they will always buy the VIP seats. Why? It offers exclusivity, the feeling of being part of an elite group. Luxury branding is similarly based on perception. A Nike T-shirt and a Palm Angels T-shirt serve the same purpose, but the weight held by the latter in terms of being a status symbol convinces people to spend that much more.
Luxury brands play into this exclusivity through their business models, which are based on the limited availability of their products, such as waitlists for Hermes’ Birkin bags and vertical integration, which means they control their own supply chain to properly supervise the production and distribution process. Brands like Armani, Hermes and Prada control most of their production sites, with only a few goods being outsourced to small workshops or sub-contractors. What defines luxury is not the product but the experience, in my opinion. In order to give their customers an experience that justifies the money they are paying, the brands need to maintain the quality and craftsmanship that consumers are accustomed to.
In terms of the numbers, this approach is clearly succeeding. Worldwide sales of luxury goods in 2019 were $305 billion, and the revenue in the market in 2025 is projected at $495 billion, with an expected compound annual growth rate of 3.94%. China has become the largest market for luxury goods, and this reflects the “glocalization” of the market — a phenomenon that describes how goods that are distributed globally also take into account the local consumers. A market that was once dominated by North America and Europe is now witnessing a paradigm shift, with the East becoming more valuable customers. The growth of luxury brands in countries like China and India has allowed them to become more cost-efficient due to the low cost of labor in these countries. This means they can now produce more, and it has subsequently led to their expansion.
As they expand, luxury brands must also respond to shifts in consumer psychology and generational preferences. Millennials and Gen-Z have established themselves as the primary consumers of luxury products, and there has been a shift away from flashy logos and extravagant labels. Consumers have now adopted simplicity — evident through brands like Celine (the poster boy of “quiet luxury”) — preferring craftsmanship over brand names. This shift is mostly due to a natural drive for clarity and reducing excess in a world where we have become accustomed to it. Consumers also prefer clothing that they feel personally connected to, rather than brands overshadowing their personality.
Other shifts in the luxury market include a more sustainable approach to production. According to a survey by consulting firm McKinsey, 67% of consumers consider the use of sustainable materials to be a quintessential part of their decision to purchase a product. Chanel has responded to this preference for sustainability, using electric vehicles for transportation and switching from air to sea transportation to reduce their carbon footprint. It has also acquired two Italian leather goods manufacturers in an effort to localize material sourcing.
The luxury market is a fascinating entity, fueled by wealth, elegance and exclusivity. The economic and psychological factors behind the purchase of luxury products allow us to comprehend why people are still captivated by these goods. The luxury market is not just about the product, but also about perception, experience and the business of conspicuity. The brands that balance these aspects will define the next era of luxury.
