Luxury goods, or luxury goods as they are sometimes known, are those items that are expensive relative to the cost of production. In economics, a luxury good is an item that has high fixed costs, meaning that increases in income significantly increase costs, so that increases in expenditure on the good become a smaller proportion of total income. Luxury goods generally have a high fixed rate of depreciation that is below average rates, although there can be short phases of rapid depreciation due to particular products, such as property. They also tend to have very high inflation, although this can be offset by some measure of governmental stimulus.
Generally, luxury goods tend to have a high margin of profitability over their actual value, and so are subject to rapid price appreciation. The prices of luxury goods are affected by a number of factors, including demand (a factor that determines both supply and demand), the relative priority of other goods in the basket, the degree of competition among sellers of luxury goods, and factors in the international pricing system. While some luxury goods do not have direct competitive advantages, they can usually be purchased at a lower price than similar goods produced in less advanced countries and so provide a route of protection for the domestic producers of luxury goods. However, they are not an area where competition tends to be especially robust, and so relatively lower quality goods can command a higher price relative to the competition.
There are a number of indicators that indicate the relative values of luxury goods across time and space. The most common is the price elasticity of luxury goods, which is the ability of goods to change their value as a result of changes in relative demand and price. If there is a large amount of global investment in luxury goods, they tend to depreciate in value. This can create excess demand, which drives down their price. Another indicator of market interest in luxury goods is the level of competition between sellers. If there is a very high level of rivalry, then prices are likely to be driven up.
The nature of the goods themselves also determine their price. Luxury goods tend to be highly specialised, which makes them less generalisable and hence more difficult to replace in the market. The prices therefore are more sensitive to changes in the supply of the raw materials used to make the products, and so tend to have a high fixed cost relative to other goods. Luxury goods differ from other products in this respect.
There is also an important geographic feature of luxury goods. Products luxury can only be afforded by those in wealthy areas of the world. This has important implications for pricing, since products that are more expensive in emerging markets will necessarily be more expensive in developed countries.
Market dynamics also determine the prices of luxury products. Luxury goods compete with other goods in the market, and so demand and supply forces determine their prices. It is usually the case that products more costly than normal will command a higher average price than less costly goods. High-end goods such as furniture command a premium over other products, and so will command a higher price than lower-end products. In the same way that high-priced items tend to have limited supply, luxury goods tend to have a large supply relative to demand.
As the market for luxury goods becomes more established, more elastic demand develops for these goods relative to other goods. Luxury goods do not depreciate in value with time as other goods do. Demand remains strong over time, so that the relative values of luxury goods remain relatively constant over time. Since luxury goods are so highly desired, the relative values of the supply of luxury goods will tend to drop to zero over time. This results in competition between luxury goods, with the consumer driving up prices to match those of competing goods, with the ultimate goal of reducing overall costs.
As a result of the factors above, it is usually necessary for suppliers of luxury goods to establish accounts, both local and international, to track their inventories. Luxury goods are a highly perishable item, and so the nature of the supply chain needs to take into account whether goods need to be stored cold or warm. Local inventories are likely to be local to the location of the business that they belong to, as well as to the products that they manufacture. International inventories are likely to be ordered from distributors that are based internationally, or from wholesalers that are based within the country of origin of the luxury goods being sold. Wholesale accounts, which combine the records of several importers and a single distributor, allow the exporter to provide an accurate analysis of his or her market.