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Prada, princesses, product placement

January 23rd, 2007

I watched The Devil Wears Prada not long ago – as the name implies, it’s not short on product placement, though of course this is part of the fun. The central character, played by Meryl Streep, is the editor of a fashion magazine and the heroine/narrator is hired her assistant. Streep’s character is represented as an impossibly demanding princess – the first illustration of this being an imperious demand for Starbucks coffee, delivered in a paper (or maybe even styrofoam) cup. Even allowing for the needs of product placement, and the curiously high status of this coffee-shop chain in the US, this strikes me as way off the mark. Surely she should be demanding her own personal barista, freshly grinding exotic coffee beans, and delivering the product in brand-name china (compare the gangster-movie financier in Mulholland Drive who spits out the coffee with which his hosts have struggled desperately to please him).

But all this comes to the central contradiction of promoting luxury consumption, discussed here not long ago. On the one hand, we want to read about and watch the luxury products of the rich and famous, and advertisers want to exploit this. On the other hand, if we could all afford to buy it, it wouldn’t be luxury consumption. There are ways around this – for example, Gucci makes its name with impossibly expensive clothes, but makes much of its profits by attaching its brand name, and the associated high markups, to lower-priced products like sunglasses.

Of course, I’m using “luxury” in a special sense here. Refrigerators were once available only to the wealthy, but they are valuable because they are useful. Now they are cheap and widely available (note that other items, like university education are going in the opposite direction), but this isn’t a problem. By contrast, the kind of luxury I’m talking about, represented most clearly by high fashion relies on exclusiveness for its value. In the end, this is a zero-sum game, which probably explains some of the oddities of fashion.

Edited in response to comments

  1. Joseph Clark
    January 24th, 2007 at 00:52 | #1

    I don’t see a contradiction. As you note, refrigerators were once luxuries and are now necessities. Same for cars, computers, mobile phones, etc. When the rich buy expensive luxury goods they subsidize industry development for the rest of us. How’s that a zero-sum game?

  2. Paul G. Brown
    January 24th, 2007 at 04:41 | #2

    Methinks, John, you’re thinking too much like an economist. From Gucci’s point of view, their “luxury” goods actually drive their business growth.

    The important word here is ‘brand’. You’re exactly right that many of the ‘luxury brands’ make their profit on their relatively high-volume lines of business. But even these goods aren’t truly high-volume in the sense of, say, supermarket retail. What these goods do have is really steep retail mark-ups. See this lil’ Brad DeLong handout for an example. This markup is possible because of the ‘social utility’ (prestige) that attaches to the brand.

    Gucci’s “high end” / “luxury” / “low volume” lines are loss leaders. Their function is marketing. These goods build the value of the brand that Gucci then attaches to the higher volume products. By doing “luxury” well, Gucci increases demand for their lower end goods and thereby their own sales, margins, and ultimately profit. So investment in “luxury”, from Gucci’s point of view, isn’t zero sum at all. It’s investment in “luxury” that builds brand value and becomes their growth driver.

  3. jquiggin
    January 24th, 2007 at 05:32 | #3

    Maybe I didn’t express myself well here. Joseph, I’m precisely making the point that there is no problem with good like those you mention, only with items where the luxury cachet depends on exclusiveness.

    Paul, that was exactly my point – Gucci solves the problem of marketing luxury (and charging the associated markups) while selling mass-market goods in exactly the way you describe. I might edit the post to fix this.

  4. January 24th, 2007 at 07:12 | #4

    I also wonder what increasing international trade will do for the exclusiveness of products that were luxury and mass market in different respective countries. An amusing example was that my (Japanese) wife got excited at the sight of several Falcons in a car park. In Japan it seems, Ford is a prestige brand. The distribution networks of cars aren’t going to be changed by Amazon or eBay, but most kinds of goods that have tried different prestige in different markets may be struggling.

    On a side note, the beer Amstel( http://au.amstel.com ), which I was favourable towards in highschool because it was so cheap, has recently changed its bottle shape….and doubled the price. I want to see if it is really that easy to create a prestige brand. But hey, Lion Nathan is selling Kirin (the XXXX/Tooheys New of Japan) as a trendy beer in Australia, and they don’t even change the bottle.

  5. January 24th, 2007 at 08:37 | #5

    The rich need luxury brands, exclusive products and social status (ie a regular ego massage) to compensate for the decline in utility of top end income. If we couldn’t bribe them into being producers with these trinkets and symbols then they would stop slaving at the office and risking their capital. And fashion models, young marketing whiz kids, retailers and manufacturers would all have to find other jobs.

    Of course there are other ways for the rich to fufill the universal human quest for significance. Warran Buffet apparently pledged 85% of his wealth to the Gates foundation. Like the Pharohs of ancient egypt they want their memory to be immortalised and curing humanity of a major disease is a cut above constructing a large building. And Qantas CEO Dixon just did a similar thing, although not on quite the same scale (ie tens of millions not tens of billions).

    Personally I like my exclusive backyard. Exclusive because I can exclude anybody I feel like excluding.

  6. Steve
    January 24th, 2007 at 08:38 | #6

    John,

    Perhaps we need to give more credit to the skills of advertisers and brand builders. You use the word exclusive. I think that a lot of these brands carefully build a perception of their product as exclusive so that people will buy, even though they are not exclusive in reality.

    the iPod is a good example of an expensive ‘must have’ status item that huge numbers of people purchase even though there are plenty of cheaper and just as effective alternatives.

    Perhaps there is no contradiction for the advertisers. The contradiction only lies with consumers who let themselves be mesmerised into thinking a product is more exclusive and special than it actually is.

    Or maybe the problem is that the discussion has not adequately addressed the reasons why people might regard a particular product as special.

    e.g. if a brand like Louis Vuitton market their ugly handbags as luxury and exclusive, then maybe people buy them not because they personally think they are exclusive, but because they think that a sufficient number of other people will see the bag as exclusive – its not me who’s fooled, its everyone else!

    Or maybe nobody is fooled – maybe everyone knows that LV handbags are ugly, overpriced and ridiculous, but it doesn’t matter people buy them anyway because they are powerful and ignore the criticisms of others.

  7. January 24th, 2007 at 11:14 | #7

    john – I think you have written about this before – but Starbucks is considered “classy” in many parts of the world – just not in australia and especially not in melbourne.

    I’m fascinated by the ability of marketteers to sell the “exclusivity” of commonly available items.iPod is a wonderful example – anyone (with sufficient $) anywhere in the world can buy an iPod, yet somehow people feel that having the white headphones on the train confers specialness.

    I’m always thrilled when my gold squarish watch with brown leather band is commented on. Its not a copy of anything but it cost me au$2 in a Hong Kong nightmarket 4 years ago. S far I’ve replaced one battery @ au$4. It tells the time. Up close with a good look it clearly is a bit shabby but most people don’t put their face 6 inches from my wrist.

    I can tell quality from crap but I can’t tell a genuine brand item from a copy and I would have thought most people are the same.

  8. wilful
    January 24th, 2007 at 11:33 | #8

    Burberrys have screwed their status by being just cheap enough to be an aspirational purchase (as well as easy to rip off) by bogans (chavs) in nasty parts of england.

    Criedit cards are a funny status symbol. Used to be that a gold card meant you were a bit flash, but no longer. These days there are super-exclusive black cards and all that wankery.

    Richard, the Kirin that’s being sold here is the premium Kirin, not the base model stuff. Speaking from recent experience, the basic Kirin is pretty foul, there is a big difference in their levels. I was always impressed that Carlton Cold would sell for more simply because it was in a clear glass bottle (which does nothing for its shelf life).

  9. Steve
    January 24th, 2007 at 12:47 | #9

    I can remember being aghast that anyone would want to buy a fridge with a TV and internet capabilities embedded in its door.

    Until someone raised the point that nobody expects LG to turn a profit from the sale of internet fridges, but rather, these ridiculous fridges are produced and hyped up to build the reputation of LG as a provider of innovative and high-tech products, so that more people buy the standard LG appliances.

    These items might rely on exclusivity for their value to the minority of wealthy people who wish to blow some of their cash on them. But to the majority, they are in fact massively overvalued – I have the money in my bank account to buy my girlfriend a $3,500 Allanah Hill dress made of tissue paper, gauze and coloured scraps of rag, but as if I would!

    Another anecdote: In one public sector job I had, we used to hold these regular seminars for industry. We weren’t interested in covering losses from the seminars (we had the budget), we just wanted people to attend.

    At first the seminars were free. Hardly anyone came. We quicky realised that by charging $100, attendance would be much better.

  10. pablo
    January 24th, 2007 at 13:04 | #10

    The beer thing is worth exploring. My son, broke and attending uni, has taken to drinking some beer with ‘platinum’ in the title. Forget ‘gold’ try the platinum. I tried to reason with him on marketing hype, to some avail. He now wants to make home brew. How long before we’re foisted with a diamond beer brand?

  11. Joseph Clark
    January 24th, 2007 at 14:58 | #11

    I’m still confused. I don’t see anything wrong with people selling a brand purely on exclusiveness. Some people like to be special so the market provides for them. They obviously get a lot of value out of it and the firms are making money so I don’t see any zero-sum game. Maybe there’s some kind of consumption externality from jealousy but if we’re going to get all Pigouvian on consumption we should start taxing anybody who buys anything unusually nice.

  12. January 24th, 2007 at 16:25 | #12

    Very interesting comments so far. But I think the good prof. Q was hinting at something a little bit deeper. Exclusivity (and its perception v/s reality) goes to the heart of the economics question and that is Scarcity.

    According to the economic basics (the market, law of demand/supply, etc) if diamonds were easily mass produced and abundant then their price would plummet, even if they still held some valuable properties and industrial uses.

    But there are two distinct domains here. One is the “real” scarcity or exclusivity of X product and the other is “the market’s perception” of its prestige status (also the perception of its scarcity). Both can be affected by industrial developments and changes in supply, distribution, etc, but the perception side of the equation is the marketer’s Holy Grail.

    If marketing, culture, fashion, music, etc. can be changed and linked and subtly moved to be aligned with X product, the return (ie: price that suckers are willing to pay) can be huge, totally out of proportion to the required investment to achieve such change in perception.

    Therefore we have products such as starSucks coffee that are totally crap but which is “prestigious” to many suckers who do not know any better…

    Now to the prof’s question about the exclusivity or not affecting the status of such goods. I remember many of such brands (Oroton, Gucci, LV, many perfume brands come to mind) which used to be really really hard to get. Unless you went to a really upmarket store normally in a large city’s CBD or a large airport, you would have to get them overseas.

    But a couple of points have now changed this: our wealth and the distribution networks. A lot of the developed world has become a hugely richer (even if its distribution is quite unequal) and even some developing countries have sizeable middle classes that have also become “aspirational” to consuming those products.

    So while before the per capita consumption of perfumes, say, would be one bottle per person per year (for an anniversary, B’day, etc), nowadays its more likely to be much higher, available in most suburbs and even small regional centres.

    A few bottles of perfume at the big sales, another one because of a new brand launch, another three or so become the “daily use” perfume, another one as gift for Valentines, another one or (two in a big gift box set) for the anniversary, another one bought during holidays o/s, etc. So the average consuption is now gone to 4-5 bottles of perfume a yr, expanding the pie for the whole industry.

    Now, we haven’t even touched the really interesting side of the argument, and that is the mentioned lowering of those barriers (international travel), a more integrated global economy and internet ordering and distribution.

    For example, ebay can show the real value given to really scarce goods (Elvis’ last half-eaten doughnut, a ticket to Sydney’s BDO, the first few available iPhones, etc), but the impact of knowledge products that are very easily distributed online at almost zero cost of reproduction is only just starting to be felt (music/program downloads, reports, photographs, books, etc). Those can still be considered highly unnecessary products that are not quite luxury, but still atract huge prices because of the current distribution models, the economics of those industries and the way their factors of production are organised. ok, better shut up now!

  13. January 24th, 2007 at 19:57 | #13

    And then you’ve got Carlton Crown Lager which is no different than any of its other beers except for the “classy” bottle.

    Richard: There is a probably a good reason why Ford is an exclusive brand in Japan. Namely protectionism. For the same reason Mercedes Benz is an exclusive brand in Australia but a taxi and fleet car in Germany. They are really expensive because of import tarriffs, so the manufacturer has no choice but to market them as an “exclusive” brand.

  14. Paul G. Brown
    January 25th, 2007 at 03:51 | #14

    Carlos makes a good point.

    Looking at it in terms of technical difficulty, it’s no harder to assemble and distribute a Gucci shoe or Crown Lager beer or an iPod than a competitive product. And while I’ve heard ‘Oh but the aesthetics! The design!’ cooed by columnists in glossy mags, my limited understanding of ‘good design’ (tasteful form fitting function) suggests to me that the market should consists of a tremendous variety of complementary goods. Insert a mumble here about ‘the long tail’ and what-not.

    So in addition to the ‘social utility’ of the brand, its my perception that many of these firms seek to justify the markups by producing fewer of these products and making them harder to find. Apple — for example — has for its entire corporate history had ‘production difficulties’ in all its hardware, an excuse trotted out in more recent times by makers of games machines (Wii, etc).

    So it’s a nice scam, all up. ‘Luxury’ firms don’t derive their profits by manufacturing goods in response to demand. Their profit derives from a manufactured scarcity!

  15. January 25th, 2007 at 06:24 | #15

    The iPod one is a perfect example. Apple Computers spent years selling underspecced, overpriced computers to buyers who bought them in part to be part of an exclusive club (non-Microsoft users). The exclusive brand image they built during that period is helping to get top dollar on iPods now.

  16. wilful
    January 25th, 2007 at 08:43 | #16

    If you’ve actually used an iPod and compared it to its similarly priced competitors, it is better designed, more functional, neater. It is worth a premium, and not just because of its status. Mind you, apple were clever in making distinctive headphones (though not well designed), so everyone knew you were part of the kool klub.

  17. Terje
    January 25th, 2007 at 08:59 | #17

    ‘Luxury’ firms don’t derive their profits by manufacturing goods in response to demand.

    No producer whether they are a worker selling labour services, a manufacturer selling shoes or a phone company selling internet time produce merely because there is demand. They are all driven to produce as a means to satisfy their own consumption imperiatives. Demand is something that they seek out and make use of. And demand is something that places constraints on their activities. However demand is not what motivates the producer to produce. The desires of others is not the prime mover behind the actions of the producer but rather the desires of others is something that the producer uses to fufill her own needs. To suggest otherwise is to conflate the word demand with the concept of command. Producers are not commanded by consumers.

    Production is the process of creating the currency with which we may purchase the wares on sale from others. When ethiopians starve it is not through a lack of desire for food but from a lack of production that would afford them the ability to consume.

    It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803: p.138-9)

    SOURCE: http://en.wikipedia.org/wiki/Say's_Law

    As a classical economist Marx (like Jean-Baptiste Say) and was better than Keynesians in so far as he recognised that the means of production was more critical to prosperity than attempts at tampering with “aggregate demand”.

  18. Paul G. Brown
    January 25th, 2007 at 09:48 | #18

    Terje –

    what the evidence suggests it that it is possible to create the consumer demand to which the producer then responds.

    Or are you arguing that advertising doesn’t work?

  19. Paul G. Brown
    January 25th, 2007 at 10:07 | #19

    wilful –

    from the fact that the iPod meets your tastes it doesn’t follow that the product is to everyone’s. My assumption is that human preferences are as diverse as human experience. Why then, do we prefer an instance of an industrial artifact instead of something more ‘personalized’? I have a friend, for example, who is constantly and massively irritated by mass produced good because she is left-handed! ( I know! I know! Economies of scale, etc …)

    Our economic choices are at least in part determined by irrational factors (contra Says and the entire classical school). To me, at least, there seems more truth in Keynes writing about the “animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” than in the classical school’s dry depiction of economic agency.

    I am rarely rational. And even when I am in a rational mood, rarely well enough informed. ‘Luxury branding’ plays on these human frailties.

  20. Steve
    January 25th, 2007 at 10:39 | #20
  21. Jill Rush
    January 25th, 2007 at 23:00 | #21

    What is intriguing is that exclusivity does not equate to quality and people are often happy to buy cheap fakes than the real thing – as long as other people will think that it is the real, expensive thing. Scarcity of goods takes back seat to increased social prestige and status. The ipod has developed a bad reputation for reliability among teenagers – but many still buy less than adequate goods as there is more status attached to ipod than other cheaper players. I wonder what this is doing to ideas of consumption in the future.

  22. James Farrell
    January 27th, 2007 at 15:39 | #22

    Terje

    You’re presenting a hopelessly naive version of the debate over Say’s Law, as I’ve pointed out at least once before. The fact is that people do postpone their purchases and accumulate money in the meantime, and variations in demand do cause variations in economic activity. Early classical economists, including Say, were inconsistent on this point, but the later ones were not. Try reading J.S. Mill’s essay ‘On the influence of consumption on production’. The real question is rather whether there are automatic mechanisms to push the economy back to full employment after a slump, and how fast they work.

    It’s nice to see you praising Marx, albeit for the wrong reason. His analysis of the business cycle was way ahead of its time, and he was well aware of the importance of demand.

    Keynes’s role in all this was to present a strawman version of Say’s Law according to which a general glut is a logical impossibility (which no sane person believes), a ploy which served to obscure the subtleties of the nineteenth century debates on monetary theory.

  23. January 27th, 2007 at 18:06 | #23

    JF, as I see it the Real Balance Effect which Pigou discovered, and some of its variants (though not the psychological wealth effects of just feeling richer, since that doesn’t represent genuine command of potential resources) do indeed represent automatic feedback systems of this sort. They are slow, but interestingly this is the obverse of their stability; if they operated too fast, they would tend to overshoot.

    Once you add to that a healthy money market, you should find that that extrapolates the corrections enough to speed things up. But I don’t see these effects as enough to cope with genuine exogenous shocks of the sort that take generations to sweep through, and I don’t see the real economy ever being free enough of them unless it is compartmented (quasi-autarkic) and local failures can be mitigated. It just doesn’t look realistic in practice, while I don’t think deliberate intervention works OK either because of Pilot Induced Oscillation (PIO).

  24. James Farrell
    January 29th, 2007 at 00:30 | #24

    PML, I doubt Pigou would have claimed to have discovered the Real Balance Effect, even if his name is associated with it. Keynes understood it, as did the Swedish school, I think. It appears in Mill’s essay that I referred to above, but probably goes back further than that. In any case, you don’t seem to be disagreeing with my point to Terje.

    For what it’s worth, your second paragraph sounds like a version of Leijonhufvud’s ‘stability corridor’ thesis. I don’t find it very convincing, but we’re a bit too far off topic as it is.

  25. January 30th, 2007 at 00:06 | #25

    Sorry, I wasn’t trying to assert “the Real Balance Effects as discovered by Pigou”, rather “the particular one of the Real Balance Effects that Pigou pointed out as being relevant in this respect”, unlike a mere wealth effect might start people spending from feeling better off, but would adjust rapidly if it had no substantive basis to keep it going.

    The thing is, many simplistic models work only with time derivatives – flows – and so, if the stabilising effects exist among the capacity effects before differentiating, then any model that works only with derivatives must inherently fail to show any stabilising mechanism. Coming from a mathematical background and knowing these things, that smelled to me when a Keynesian (the last in captivity?) gave our MBA macro unit.

    So I kept my mouth shut and looked in the literature for anyone who had worked with abstractions that did not leave out what differentiating leaves out, and Lo! I found that Pigou had made similar points in an attempt to rebut Keynes’s position that you needed a planning agency to keep things working, and had dismissed rentiers as drones when they appear to me at least as useful as speculators in all this (whatever their personal qualities).

    I was particularly impressed by Pigou since I found he had also looked at the externality areas I was also being pointed at by people who thought they were showing me something else. It does help to compare Coasian solutions to his work to spot gaps in over-simplified suggested solutions (Coase himself was far more thorough than some who think they are employing his techniques – they externalise the costs of policing, and ignore the wealth transfers involved in creating new asset bundles).

    But as you said, all this is getting rather far off topic. However, I do think that if things were ever to get near enough stability by accident or design, then Real Balance Effects could keep it that way even in the face of ordinary shocks, if only there were enough wealthy enough individuals around – but adding attempts at central control is more likely to create instability from PIO. (And wealth here means realisable wealth and/or control of revenue streams, none of this cashing in the house US stuff.)

  26. February 1st, 2007 at 17:00 | #26

    Yobbo: Mercedes-Benzes, while not being the otherworldly vehicles that they are here, are expensive even in Germany.

    Most Germans drive around in VW Polos and Ford Focuses.

  27. marcelproust
    February 11th, 2007 at 01:45 | #27

    I can’t agree with you about the “Starbucks” anomaly. I reached the same conclusion as you that it must be product placement. It is hard to believe that a cosmopolitan woman who travels annually (at least) to Paris would be hooked on big (and usually rather weak) takeaway coffees – but then, New York coffee, the one time I was there, was pretty dire, and Parisian coffee also often leaves something to be desired.

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