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Why Luxury Brands Choose Such High Prices

http://www.bbc.com/capital/story/20171006-the-psychology-behind-spending-big

When talking about Network Effects we discussed that when the price for an item is lower more people will buy because it makes the fraction of the population of who can afford it larger. Thus, people will sometimes buy inferior items over quality items just because it’s cheaper.

However, I started thinking about how giving an affordable price to get people to buy isn’t a strategy that’s always used in the real world. Luxury brands are notorious for hiking up the prices on items that don’t need to be that expensive. There are cases in which a luxury brand and a department store can have essentially the same exact item, but drastically different prices.

The article brought up how there is a certain psychology as to why people will pay so much more for an expensive item. It has to do with how people assess the amount of enjoyment they will get from an item based off of the price. An example they used was how people enjoyed more expensive wine than the cheap wine. Yet, they were actually drinking the same exact wine! This example could show that price can act as either a high or low signal. When people were told it was a cheap wine they took it as a low signal and believed that they were in a bad state of the world. Hence, they expected the wine to not be very good. When told it was an expensive wine people would see a high signal and assume they were in a better state of the world, which made them enjoy the experience of drinking that wine more.

This is because people assume that with a higher price it is also higher quality and that with expensive items there is a level of exclusivity. Exclusivity is key as to why people perceive the item as better. The fact that one must have a higher reservation price than a large amount of the fraction of the population gives a person satisfaction since not everyone can afford that experience.

An information cascade can occur with material items due to a direct-benefit reason which is when you copy what others do and disregard your own personal information since you will gain some kind of benefit from it. They used a racecar driver Joshua Cartu as an example in that he bought Ferraris because he wanted to be included in specific social circles. Hence, aligning his purchases with the ones of the people he wanted to be friends with. Therefore, the direct-benefit would be acceptance into an exclusive group.

Though perhaps this trend in looking at more expensive material items will change as the article states there is a shift occurring from material luxury good to spending money on experiences.

 

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