PSID + luxury goods

I am very excited to share with you a repository for all who are interested in using the PSID data from Umich. I have uploaded on my Github some R code which helps reading, processing and saving the R datasets from the Stata datasets from the Panel Survey. Here is the link:

Feel free to use and share.

About luxury goods. This is a little question that came about while I was a TA for a Pricing Strategies class. I started wondering what it really means to say a “luxury good”. We many times think in economics that luxury goods have an increasing demand function, but this is nonsensical, because if that were the case, the profit would be infinite provided that the marginal cost is below the marginal revenue. Even then, more fundamentally, it would be necessary to have some bound for the demand function, as I don’t think anyone has really no-satiation on Gucci bags. Without going deep into economic theory on what it means to have a demand function and infinite desired goods, I still think it is easy to understand that it is not reasonable to think that the higher the price, the more people would be willing to pay for it. However, it is true that some individuals would be interested in buying those goods at higher prices, whether because they appreciate the quality or because they want to simply signal they are somehow better or richer than others.

The signaling theory is reasonable, as it provides a framework as to why some goods that are otherwise similar to their regular equivalent can be sold at ridiculous prices. Using a Tomistic approach to it, could we classify this as vice? Vice in the sense of pride, that is, wanting to stand out beyond the others due to a false belief of one self. My sense is not only yes, but that our current culture promotes that a lot. Let me explain.

Advertising is generally understood nowadays not as a truth-enhancing mechanism, but as an exaggeration of reality, when it’s not plain lies about a product. We are so used to reading “best tacos in world” that we no longer think of it as a ridiculous statement. It also voids the statement from its true meaning, as we know it is not possible that every taqueria we go to is the best one in the world. But companies do this for one good reason: price differentiation. Companies are always looking for a way to make their product different from the commodity so they can surcharge a price. That’s why people will get worried if you don’t get the best brand (meaning the most expensive one) when it comes to security. It’s a similar problem in hospitals, by the way, where people generally speaking want the “best doctor” available on the market.

In the end, the signaling theory of luxury goods is not very hopeful, as it reveals a rather sinful trait both of our society and of the market economies. This is not to demonize it, by the way, but to raise awareness of what it means, at least in one lense. I certainly think that the market approach is much better than pretty much any other allocation mechanism we have figured out. To a certain extent, price differentiation includes in its simple function both the vicious and the disordered man. It is then the responsibility of some other entity to handle its negative consequences.

As an exercise to ilustrate the last point, think of this: imagine you had the record of alcoholics addresses in a given area. Would it be ethical to send advertising of alcohol to those addresses? Food for thought.

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