The Economics of Luxury Goods: Utility Based on Exclusivity

Abstract

We propose a model describing consumer demand for a luxury good, in which the perceived quality of the good is related to its exclusivity, that in turn depends on the number of consumers buying it. 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 producer and the social planner may to some extent be aligned.