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A luxury sedan is an example of a luxury good.

In economics, a luxury good is a good for which demand increases more than proportionally as income rises, in contrast to a "necessity good" for which demand increases less than proportionally as income rises. Luxury goods are said to have high income elasticity of demand: as people become wealthier, they will buy more and more of the luxury good. This also means, however, that should there be a decline in income its demand will drop. It must be noted, though, that income elasticity of demand is not constant with respect to income, and may change sign at different levels of income. That is to say, a luxury good may become a normal good or even an inferior good at different income levels, e.g. a wealthy person stops buying increasing numbers of luxury cars for his automobile collection to start collecting airplanes (at such an income level, the luxury car would become an inferior good).

1 Socioeconomic significance
2 Market characteristics
3 Luxury brands
4 Advertising
5 Market size
6 Market trends
7 See also

Socioeconomic significance

18 or more Karat Gold jewelry is an example of a luxury good.

Certain manufactured products attain the status of "luxury goods" due to their design, quality, durability or performance that are remarkably superior to the comparable substitutes. Thus, virtually every category of goods available on the market today includes a subset of similar products whose "luxury" is marked by better-quality components and materials, solid construction, stylish appearance, increased durability, better performance, advanced features and so on. As such, these luxury goods retain or improve the basic functionality for which all items of a given category are originally designed.

There are also goods that are perceived as luxurious by the public simply because they play a role of status symbols as such goods tend to signify the purchasing power of those who acquire them. These items, while not necessarily being better (in quality, performance, or appearance) than their less expensive substitutes, are purchased with the main purpose of displaying wealth or income of their owners. These kinds of goods are the objects of a socio-economic phenomenon called conspicuous consumption and commonly include luxury cars, expensive watches and jewelry, designer clothing, yachts, and large residences such as McMansions, urban mansions and country houses.

Market characteristics

Some luxury products have been claimed to be examples of Veblen goods, with a positive price elasticity of demand: for example, making a perfume more expensive can increase its perceived value as a luxury good to such an extent that sales can go up, rather than down.

Although the technical term luxury good is independent of the goods' quality, they are generally considered to be goods at the highest end of the market in terms of quality and price. Classic luxury goods include haute couture clothing, accessories, and luggage. Many markets have a luxury segment including, for instance, cars, wine, bottled water, tea, and chocolate.

Luxuries may be services. The hiring of full-time or live-in domestic servants is a luxury reflecting disparities of income. Some financial services, especially in some brokerage houses, can be considered luxury services by default because persons in lower-income brackets generally do not use them.

Luxury brands

Armani is an example of a luxury brand for clothing.

A luxury brand or prestige brand is a brand for which a majority of its products are luxury goods. It may also include certain brands whose names are associated with luxury, high price, or high quality, though few, if any, of their goods are currently considered luxury goods. The automobile manufacturer Hummer is an example of such a brand, as a Hummer automobile is perceived to be a status symbol,^{citation needed} even though none of the vehicles in the Hummer line-up meet the requirements to be classified as a luxury car.

Another market characteristic of luxury goods is their very high sensitivity to economic upturns and downturns, high profit margins as well as prices, and very tightly controlled brands. Other guidelines may apply to certain luxury markets such as the luxury vehicle market.

For example, following a nearly crippling attempt to widely licence their brand in the 1970s and 1980s, the Gucci brand is now largely sold in directly-owned stores. The Burberry brand is generally considered to have diluted its brand image in the UK in the early 2000s by over-licensing its brand, thus reducing its cachet as a brand whose products were consumed only by the elite.

LVMH (Louis Vuitton Moet Hennessy) is the largest luxury good producer in the world with over fifty brands, including Louis Vuitton, the brand with the world's first designer label. The LVMH group made a profit of €2bn on sales of €12bn in 2003. Other market leaders include PPR (after it purchased the Gucci Group) and Richemont.

A rather small group in comparison, they tend to be extremely influential. Once a brand gets an "endorsement" from members of this group, then the brand can be defined as a true "luxury" brand. An example of different product lines in the same brand is found in the automotive industry, with "entry-level" cars marketed to younger, less wealthy consumers, and higher-cost models for older and more wealthy consumers. The least expensive Mercedes-Benz sold in America is the C300 sedan at $32,000, and the most expensive model is the McLaren SLR coupe at $497,000.

Advertising

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There is an important balance of emotional and rational communications when a luxury brand connects to its customers through a variety of brand advertising. Historically, luxury brands, especially fashion brands, use heavy visual aids to help foster a sense of emotional connection - a state of being or sense of being. The status of owning luxury brands is important for the affluent or high net worth consumer, as they feel it expresses their class or self-expression. Advertising also ensures that other people who cannot afford the luxury item are nonetheless aware of its expense, which is essential to conferring the status that the consumption of luxury promises. In other cases, luxury brands can connect to the consumer on a very rational level focusing on purpose or function, such as owning a plane or a private jet, or a fractional owner.

Market size

The luxury goods market has been on an upward climb for many years. Apart from the setback caused by the 1997 Asian Financial Crisis, the industry has performed well, particularly in 2000. In that year, the world luxury goods market – which includes drinks, fashion, cosmetics, fragrances, watches, jewelry, luggage, handbags – was worth close to US$170 billion and grew 7.9 percent.¹ The largest sector in this category was luxury drinks, including premium whisky, Champagne, Cognac. This sector was the only one that suffered a decline in value (-0.9 percent). The watches and jewelry section showed the strongest performance, growing in value by 23.3 percent, while the clothing and accessories section grew 11.6 percent between 1996 and 2000, to US$32.8 billion. North America is the largest regional market for luxury goods: unlike the modest 2.9 percent growth experienced by the Western European market, the North American market achieved growth of just under 10 percent. The top ten markets for luxury goods account for 83 percent of the market. The U.S. is the largest market for luxury goods; others include Japan, Germany, Italy, France, UK, Canada, Spain, Switzerland, and Russia.

Market trends

The three dominant trends in the global luxury goods market are globalization, consolidation, and diversification. Globalization is a result of the increased availability of these goods, additional luxury brands, and an increase in tourism. Consolidation involves the growth of big companies and ownership of brands across many segments of luxury products. Primary examples include LVMH, Richemont, and Gucci, which dominate the market in areas ranging from luxury drinks to fashion and cosmetics. Leading global consumer companies, such as Procter & Gamble, are also attracted to the industry, due to the difficulty of making a profit in the mass consumer goods market.