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Birkin Bag

When examining network effects with crowds and trends I thought about the birkin bag. This is an article about the interesting economics of the birkin bag. For those who do not know, the birkin bag is a luxury handbag that costs between $12,000 to $300,000. The interesting part of the bag however, is not the price but how the company makes the bags. The purses are made out of leather or animal skins such as crocodiles which makes them expensive, but does not justify the insanely high price. What does justify the insanely high price is the scarcity of the product. The company purposely does not make enough bags to meet the demand. Customers are on wait lists for years until they are able to get a bag, and stores that sell them usually only have one or two bags on hand. Those bags obviously sell out very fast. Often you have to know someone to get a bag which means celebrities have them. Basically you have to have money and have powerful connections to get a birkin bag. If I saw someone with a birkin bag I would go “oh my god who are they, they must be important!” If I saw someone with a coach or prada bag I would just say oh that person is probably wealthy.

What I thought was interesting about birkin bags was comparing it to network effects that we would expect to see. In a market following the p = r(x)f(z) equation there should be 3 values of z for p*. (I’m assuming for this example the equation is just a quadratic). The first value of z that is in equilibrium with p* would be z = 0. This is that if no one has the bag, then no customers would want the bag which makes sense. The next value of z equals z’. This is an unstable equilibrium because as market participation goes below z’ it will drive customer participation to 0 and if market participation is slightly above z’ then demand will increase to z’’ which is a stable equilibrium. What I find interesting about the Birkin Bag example is that the market is kept at a non equilibrium amount of market participation. There are so many people that want to buy a bag, that just can’t get to a store that sells them, or are on a waiting list. And somehow the market hasn’t collapsed. We learned that if the market participation is below z’ than the participation will go down to 0. But in the case of birkin bags, I don’t think this is true. The demand would not decrease to 0 because there was low market participation, demand actually increases. Birkin bags are seen as such a special item to have, part of that value is because very few people have birkin bags. So actually increasing the supply of bags would decrease value.

So The birkin bag market could reach a stable equilibrium value by doing two things, either increasing the supply of the product or raising the price. If the supply of bags increased than everyone that wanted a bag would have one and market participation would settle to an equilibrium value for that price. Or the price of birkin bags could be increased to such a high amount that the supply for the object would meet the new demand.

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