"Secret? No, We Already Know Why We're Obsessed with Luxury Goods"

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In the present world, where consumerism is prevalent, people are increasingly seeking to spend on luxury goods, and a report by J.P. Morgan shows that the luxury goods market has grown by seven per cent in the last year. Luxury goods are seen everywhere around us. When you are in a shopping mall you can see most people with an iPhone in their hand and a Chanel or Louis Vuitton bag on their back. This raises the question: how do luxury goods attract people to consume them? Why do people choose to consume luxury goods? These issues, while seemingly belonging to the study of psychology, can be explained by some of the theories of economics.

From an economic point of view, consumers are rational when making consumption choices, and luxury goods are usually considered to be high income-elastic, suggesting that demand for luxury goods should not have been strong in today's high cost of living. Therefore, the growth of the luxury goods market will not be that great in theory. However, consumers are not completely rational when making consumer decisions and they may be influenced by various factors to make biased decisions. One of these influences is known as the framing effect in behavioral economics and marketing uses this effect effectively.

Framing effect & Salience

When you browse Instagram or YouTube have you ever noticed the brands of the items these influencers use? Most of them are from luxury brands. Research has shown that the luxury goods industry mainly uses marketing through social platforms such as YouTube or Instagram to increase brand awareness (Ko et al., 2016).Moreover, studies have shown that after watching vlogs about luxury brands on YouTube, people realize that luxury goods give them a higher quality of life and symbolize a higher social status, which makes people perceive the value of luxury goods as higher and are more inclined to buy them (Lee & Watkins, 2016). Luxury goods often hold intangible benefits beyond their physical attributes. While economic theories suggest that demand for such goods should be limited, the reality is that consumers are driven by a mix of rational and emotional factors. The combination of status, quality, emotions, social influences, and effective marketing all contribute to the enduring appeal of luxury goods in our society. This phenomenon can be explained by framing and salience in behavioral economics. It's like a mental trick - luxury marketing frames these products as symbols of success, making us more likely to desire them. It's not just about the products themselves, but also about the wealth, status and prestige they represent. It is in this way that luxury marketing shapes our desire for luxury by showing us the benefits of buying brand-name goods.

Loss aversion

How would you act if everyone around you has the same style of clothes or items, but you don't? You will buy the items. What about if there is a trend right now? You will follow the trends. Humans are social animals. We all want to feel like we belong and care about our outward appearance or reputation. Thus, you don’t want to look left behind; you want to be recognized on the same or higher level. Purchasing premium assets is also the case. Because luxury goods are not only used as a tool but also to raise our social status. Just like we mentioned above. These kinds of additional value make us buy it despite the high costs. Examples include the symbolic, lasting value of items, and emotional satisfaction and happiness. To avoid the feeling of economic loss, we rely on luxury goods. This phenomenon is called ‘loss aversion’ from a microeconomic point of view. As a result, the luxury market can maintain stable demand even when economic conditions fluctuate.

Figure 1 Real GDP growth Resources: IMF report

According to a study conducted by the International Monetary Fund a.k.a IMF, it demonstrates that real GDP growth has slowed down over the last two years. Real GDP growth is one of the factors showing the economic recession. Meanwhile, a report issued by Bain & Company indicates that no matter how depressed the economy has been over the past two years (2021~2022), the amount of luxury consumption has 35% increased. This shows that luxury consumption is deeply linked to loss aversion.

Herd behavior

Another factor that influences people's willingness to buy luxury goods is herd behavior. Imagine when everyone around you is carrying a Chanel bag and wearing a Dior dress, would you desire these items as well? For example, in China, McKinsey's report charts that the number of Chinese luxury consumers has reached 7.5 million, and this number will continue to grow in the future (Bu et al., 2017).

Figure 2 Chinese luxury consumers Resources: McKinsey & Company

When the crowd of luxury consumers keeps expanding, the people around them will have the idea that "I should have a luxury product too", plus the image of high social status people created by the marketing of luxury products makes people even more afraid of losing the social status they have now because of the lack of luxury products so that they will be despised by other people, which is the loss aversion mentioned before. All these factors together stimulate the herd behavior and make people follow the trend of buying luxury goods (Pham et al., 2023).

Conclusion

So, as much research has shown, theories such as frame effect, salience, loss aversion, and herd behavior explain why we choose to wear more famous brands, even though they are the same product. In other words, buying luxury goods is not just "good" but deeply linked to how we perceive, feel loss, and judge value. All of this affects our shopping habits. Think about these points the next time you shop. Maybe you will have a new perspective on luxury goods!

Reference List

Bu, L. et al. (2017) Chinese luxury consumers: More global, more demanding, still spending, McKinsey & Company. Available at: https://www.mckinsey.com/capabilities/growth-marketing-and-sales/ourinsights/ chinese-luxury-consumers-more-global-more-demanding-still-spending (Accessed: 18 April 2024).

D’Arpizio, C. et al. (2024) Long live luxury: Converge to expand through turbulence, Bain. Available at: https://www.bain.com/insights/long-live-luxury-converge-toexpand- through-turbulence/ (Accessed: 19 April 2024). International Monetary Fund (2023). Real GDP Growth. [online] Imf.org. Available at: https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD

Ko, E., Phau, I. and Aiello, G. (2016) ‘Luxury brand strategies and customer experiences: Contributions to theory and Practice’, Journal of Business Research, 69(12), pp. 5749–5752. doi: 10.1016/j.jbusres.2016.04.170.

Kim, W. (2023). The surprising reason luxury goods are booming. [online] Vox. Available at: https://www.vox.com/money/23728283/luxury-designer-boom-nike-lvmh-pandemicle-creuset

Lee, J.E. and Watkins, B. (2016) ‘YouTube vloggers’ influence on consumer luxury brand perceptions and intentions’, Journal of Business Research, 69(12), pp. 5753–5760. doi:10.1016/j.jbusres.2016.04.171.

Luxury market outlook: J.P. Morgan Research (2023) Luxury market outlook | J.P. Morgan Research. Available at: https://www.jpmorgan.com/insights/globalresearch/retail/luxury-market (Accessed: 17 April 2024).

Pham, M. et al. (2023) ‘How does herd behavior impact the purchase intention? explore the moderating effect of risk aversion in the context of Vietnamese consumers’, Acta Psychologica, 241, p. 104096. doi:10.1016/j.actpsy.2023.104096