Abstract
We propose a model describing consumer demand for a luxury good, in which the perceived quality of the good is related to its scarcity. We use this model to analyze the optimal production and price setting decisions of a luxury good manufacturer and contrast them with the decisions that would be made by a social planner. We show that irrespective of the way social welfare is defined, a monopoly producer of the luxury good may select socially optimal prices and quantity. Thus the incentives of the monopolist and the social planner may to some extent be aligned. We also analyze whether the producer and social planner would be willing to sell the luxury good over the internet if this allowed to increase the number of potential customers for the product. We show that under reasonable assumptions the monopoly producer would not oppose the introduction of internet sales, whilst the social planner may do so, depending on the specification of the model’s parameters. This result is important in the light of the recent revision by the European Commission of its Guidelines on Vertical Restrains (2010).
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Notes
Sometimes this is called the snob effect, see Leibenstein (1950).
See, for instance, a recent article in The Economist (2010), quoting a few examples.
One can also think of n as the discrete number of consumers. We will use the terms ‘consumer mass’ and ‘number of consumers’ interchangeably.
Indeed, many competition authorities have explicitly stated their ultimate goal as the maximization of consumer welfare and not the total welfare, defined as the sum of consumer and producer surpluses.
For an overview of the theoretical research on this see Lieber and Syverson (2011) and references therein.
Of course, other considerations such as security concerns stemming from the use of the internet channel for distribution and/or adequate presentation on-line may also explain the manufacturers’ attitude.
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Acknowledgments
I benefited from discussions with J. J. A. Kamphorst, S. Petrova, M. Trubskyy. The usual disclaimer applies. The views expressed therein are those of the author only and do not necessarily represent the official views of the author’s institution—RBB Economics.
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Pruzhansky, V. Luxury goods, vertical restraints and internet sales. Eur J Law Econ 38, 227–246 (2014). https://doi.org/10.1007/s10657-012-9335-2
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DOI: https://doi.org/10.1007/s10657-012-9335-2