The Price of Luxury

The Economist notes the evolution of the economics of luxury goods over the past year: while the goods themselves have increased in price by 6%, twice the rate of inflation, the income of the rich has increased by 9%, or three times the rate of inflation.

So a question for any economists reading this: what should happen to demand for luxury goods in such a situation? (Assume that only the rich buy luxury goods, for the sake of argument, and assume also that these aren't Veblen goods which are bought because they're expensive.) On the one hand, when the price of a good goes up in real terms, then demand falls. On the other hand, the price of the good is actually going down in percentage-of-disposable-income terms, which implies that demand will rise.

But I think there's another, subtler question lurking in the background, which has to do with the psychoeconomics of purchasing decisions. If you want a certain good, there are two reasons why you might not buy it. The first is simply that it's too expensive for you: you can't afford it, or buying it will eat up too much of your disposable income. The second is unrelated to the amount of money you have: if someone tries to sell you a biro for $300, you'll refuse to buy it, even if you want a disposable pen and even if you're so rich that you wouldn't even notice the loss of $300.

I ask this because right now I'm torn about a forthcoming meal. There's a certain restaurant I want to go to. It's a very good restaurant, and it's rather expensive, and frankly it's well outside my normal budget for such things. But I've heard amazing things about the place, and I have a special occasion coming up, and, if I only go there once this year, I can afford it. So half of me (actually, a bit more than half, since I've made the reservation, and will be going there) says, well, this is what it costs, you want it, you can afford it, so just spend the money already.

But part of me is rebelling, too, and saying that the restaurant is overpriced, even if it is excellent, and that therefore I shouldn't be going. The restaurant in question makes it essentially impossible not to spend a lot of money: there's a prix-fixe menu with no a la carte option, the wine list is expensive, and their corkage fee is very high too. There's no way a meal for two is going to cost less than, say, an 80GB iPod, or a 13" x 19" Mike Monteiro print in an edition of 20. And that's excluding whatever I spend on a bottle of wine, if I bring one with me. If there are other things which are cheaper and which I'm not buying and which I value more, should I not go to the restaurant?

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