What's luxury for?

When people visit me in Los Angeles, one of the attractions I take them to is Rodeo Drive, the center of all luxurious brand names in Beverly Hills. (For movie buffs, the street has been parodied in Shrek II, and it’s where Julia Roberts was refused service in Pretty Woman.) Few of my guests actually spend money there; most of them just walk around for spectacular window displays and, if they are curious enough to walk into the stores, touches of luxury. A friend of mine, with no real intention of buying, went into the Versace store and was astonished by a $3000 jacket – costing more than two months of my rent. He asked me for an economic explanation of how a jacket that doesn’t seem very special can be so highly priced. At the time, I told him that the name Versace, even though is not shown on the jacket, is enough to differentiate it from a seemingly similar $100 jacket at Gap.

A few weeks ago, however, I had a pleasure of speaking to a freelance stylist who has worked at several photo shoots in Thailand. The topic of luxury goods again came up. He insisted that a $500 Prada shirt is superior to other regular shirts. It is made of better fabric – some fashion houses sign contracts with textile manufacturers for exclusive use of particular textiles. Prada’s craftsmanship and quality are well-regarded; with Prada’s reputation, you know that the shirt is perfection. True, but one can look pretty good in a tailor-made shirt in Bangkok for $40 or a $60 Banana Republic shirt without having to worry whether the perfect shirt would be damaged from the next imperfect laundry.

What then motivates people to spend on luxury goods? An MBA friend of mine and his team conducted a survey on potential product lines, say, furniture and home furnishings, for Louis Vuitton. Reputation, quality, design, and craftsmanship are certainly parts of the story but also cited in the survey is the feeling of superiority and better self-image as a result of owning, wearing, or carrying brand-name products. The finding is a testament to the theory of social comparison. One compares him- or herself to others, gains utility if he or she feels superior to others, and is willing to pay extra in exchange for that utility gain.

Brand-name stores exploit this need for social comparison in their creation product lines and their pricing strategy. People may hesitate to cough up a few thousand dollars for a big-ticket item but they are willing to spill a quarter of that amount for smaller ones. According to Barry Schwartz, from whom I took the Introduction of Psychology class during my freshman year of college, a $100 keychain at Tiffany no longer feels expensive, compared to a $10,000 bracelet one has eyed but couldn’t afford. The keychain is not necessarily worth that much and we don’t necessarily need the keychain, but it may be all the luxuries we can afford.

The desire for luxury has recently spawned a new line of business catering to people who can’t afford to buy luxury goods. They can now rent the pieces on a daily or a weekly basis. Ironically, they sometimes end up paying more than retail prices of the goods themselves. It seems irrational but, at least, there’s a luxury behind it.