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Friday, 6 January 2017

The economics of luxury handbags

Lessons in economics from Hermès’ Birkin handbag: the Birkin handbag from Hermès defies basic laws of economics, Brooke Unger writes in The Economist’s sister magazine 1843. The handbag, which comes with a price tag starting from USD 7,000, could not be viewed as a Veblen good, as some economists might suggest, Unger argues. With Veblen goods, “the higher the price, the higher the demand, for the more expensive they are, the more effectively they proclaim the status of their owners.” Yet, the Birkin differs from classic Veblen goods in that first they’re “not all that conspicuous… only initiates can spot a Birkin. So Veblen’s theory needs to be adapted to explain the power of inconspicuous but expensive goods.” This could somewhat be explained in literature theorising on signalling using luxury goods. The theory divides the rich into two groups: “‘parvenus’, who want to associate themselves with other rich people and distinguish themselves from have-nots, and ‘patricians’, who want to signal to each other but not to the masses. They theorise that more expensive luxury goods, aimed at patricians, will have less obvious branding than cheaper ones.” Separately, the theory also categorises people who cannot afford luxury but want to look as if they can as “poseurs,” who tend to usually go for “big logos” and are targeted by counterfeiters (we’re looking at you, Hermès belt-wearing, Egyptian-weddings roaming fellas out there).

Second, Unger says Hermès are not pricing Birkins as producers of Veblen goods normally would; “producers of Veblen goods ought to raise prices until they are just below the point at which normal economic laws start to reassert themselves… Hermès could charge far more than it does for a Birkin. Instead of rationing by price – standard market practice – Hermès rations by queue. You cannot walk into an Hermès boutique and expect to walk out with a violet ostrich 30cm bag with palladium hardware, or indeed a Birkin of any description. You have to place an order, and wait… That is why the Birkin has its own literary sub-genre while the expensive but accessible Chanel 2.55 does not.”

The way Hermès starves the market for Birkins, when it could sell many more and at higher prices, “suggests, Birkins are mined, not simply made.” Luca Solca, an equity analyst at Exane BNP Paribas says there are good commercial reason behind treating them that way. “First, it gives Hermès a buffer: even if demand drops, sales will not. Second, it creates surplus demand for the bags, which overflows into demand for other Hermès products… [second,] the wait induces ‘impatient buyers to switch to other products of the brand, to calm their hunger until the much-awaited object of desire is achieved.’ Third, although market-clearing prices might raise profitability in the short term, in the long run they would drive French women away, leaving nouveaux riches from the developing world as the bags’ main buyers.” However, at the end of the day, the perception of exclusivity depends on a ratio of people who want a Birkin, to the quantity of Birkins supplied — which could be a challenge for Hermès now. Lawyer Hélène Le Blanc fears the Birkin is becoming “too exposed” and Unger explains that “all big luxury brands fret about that risk, but even here the Birkin stands apart. The danger of over-exposure comes not from the zeal of its marketing but from the ardour of its fans.”

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