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The Luxury Market as the Rich Get Richer

agt57- Blog Post 3

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This Bloomberg article tracks the continued growth of the luxury goods market in conjunction with the rich-get-richer principle. Although the article largely focuses on the luxury automobile market, it has implications which strongly correlate with the result of preferential attachment. Preferential attachment refers to the phenomenon in which a node with more connections continues to increase its connectivity at a higher rate than others, thereby exponentially widening the initial gap between the two nodes as each of their networks continue to grow. This is explained by the power law (F(k)=a/k^c) where a smaller exponent, c, indicates more popular items. Naturally, the most simple application of this phenomenon refers to a more wealthy/connected individual’s wealth relative to another less wealthy/connected individual. On a macro level, this suggests further wealth inequality between the upper and middle classes.

The article examines this relationship under the lens of luxury car sales, specifically the top 5 luxury car brands (Bentley, Ferrari, Rolls Royce, Lamborghini and McClaren). These top 5 brands continue to see larger growth than the general automobile market. This is applicable in 2 ways. First, it shows that the world’s wealthiest people continue to have the disposable income to spend on luxury automobiles. As the article states, there are now 226,450 individuals with assets more than 30 million, a 21% increase since 2012. Similarly, “since October 2012, the combined net worth of the world’s richest 100 people has increased 39 percent, to $2.6 trillion”.

But the second, and more interesting application of the preferential attachment phenomenon, is that these top 5 brands, the most expensive and luxurious automobile options, are the only ones benefiting from this increasing wealth inequality. As the graphic below shows, the five largest ultra premium brands have grown 51% over the past 5 years. This is in stark contrast to the general automobile market, which has only grown 23% in the same time frame.

 

In summary, preferential attachment, and the related power law, can explain two increasing wealth gaps. First, the gap between ultra high net worth individuals and the rest. And second, the increasing gap between the top 5 luxury automobile manufacturers and the rest of the industry.

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