Why can some luxury brands, like Rolex, Hermès, or Ferrari, continually raise prices without denting their popularity? Even amid a so-called downturn for luxury goods, there are some companies that seem able to do no wrong, with demand—like their price tags—at an all-time high.

Auction house Sotheby’s recently highlighted that the cost of a Chanel Classic Flap bag had tripled since 2010; in 2023 the Parisian firm reported profits of nearly €20 billion ($22 billion).

Price rises of 6 to 8 percent twice a year have become the norm for Swiss watchmakers, high-fashion houses, and top designer labels, and the more expensive products account for more and more of the market: in April, Swiss watch exports rose 4.3 percent by value while also falling a similar amount in volume.

Seemingly backing up this perverse trend, Bloomberg states that the drop in consumer demand for watches has hit brands making less-expensive timepieces the hardest, while top-selling brands such as Rolex and Patek Philippe have been “more resilient.”

Indeed, the latest gold Rolex Deepsea retails, if you can get one, at $54,200; 10 years ago a Deepsea was $12,000, and there was no gold version. Meanwhile, the average cost of a Rolls-Royce more than doubled between 2014 and 2022, breaking the €500,000 barrier as it did so. Despite what you may tell yourself about your own tastes—of course you care about the craftsmanship or the engineering more than anything else—it all comes down to a phenomenon called conspicuous consumption. Items like a seven-figure Richard Mille chronograph tourbillon, or a fine Italian cashmere sweater from Brunello Cucinelli, are powerful symbols of one’s social status—and the more they cost, the more people want them.

This isn’t a new observation: in fact, it is a direct expression of the theories advanced by 19th-century American economist Thorstein Veblen, whose 1899 work The Theory of the Leisure Class introduced the seemingly paradoxical idea of such desirable luxuries—known today simply as “Veblen goods”—and the behavior which leads us to prioritize them over more sensible uses of our money.

And prioritize them we do: The luxury market is forecast to reach a valuation of €2.5 trillion ($2.8 trillion) by 2030, up from €1.5 trillion now, according to consulting firm Bain & Company.

Hard-Wired to Social Signal

But how well does a 125-year-old theory really stand up today? In a world where brands now speak of “affordable luxury,” do we still crave the most expensive items? Now that social media can supercharge social signaling beyond anything that Veblen could have imagined, are his theories similarly supercharged? And how do we account for recent downturns in the luxury market?

The truth is that Veblen’s theories—and the way they’ve been updated for the modern world—are more complex than simply equating higher prices with higher demand. It’s about the decisions we make, the society we live in, and the growing different ways we can choose to signal our social status. We’re hard-wired to want to show off, but to what extent, and how we choose to do it, can vary.

To start with, it’s all about understanding the trade-off between work and free time, explains University College London professor of economics Wendy Carlin. “You work to get income that you can spend on goods and services. As you become better off, we would expect people to both want more free time and more goods; the question is what the balance is between one or the other.”

Different societies make different choices; Carlin touches on the classic contrast between European and American work-life balance. “People say ‘Oh, the Europeans are just very lazy, and they take all these holidays.’ But they’re making a different choice in terms of the way they take advantage of their higher living standards, because the thing that’s really scarce is time.” Veblen’s theories come in when you look at why people work more in different countries, she explains.

“Some of those people are working two jobs just to survive,” Carlin says, “but some of them are working two jobs because they want to have the latest thing, the new phone, or the new car, or whatever.”

It might sound obvious to us, but it defies traditional economic theory, which, in a nutshell, says we should be happy once our basic needs are met—and it would have seemed like madness to the academics of a hundred years ago.

“It was thought that by now we would be working just two days a week,” says Carlin, in reference to John Maynard Keynes’ 1930 paper Economic Possibilities for Our Grandchildren, in which the economist predicted that improvements in technology and manufacturing efficiency would leave people needing only to work 15 hours a week. “Instead, people work two, three jobs, take two weeks’ holiday and have more goods. And why do they do that? Well, as Veblen said, because they’re comparing themselves with other people.”

As the Rich Get Richer …

We might not recognize the analysis of our working habits, believing that we all have more noble motivations at heart, but who among us can deny that we also aspire to a new Porsche, a Chanel bag, or a week in the Hamptons? Veblen’s work stated that people at every level of society would work to attain the symbols they perceiv as belonging to a superior class; it turns out that the more extreme that disparity—the more unevenly wealth is distributed in a society—the harder people will strive. “More inequality intensifies the Veblen effect,” Carlin says.

Research that compared the income share of the top 1 percent of earners with the average number of hours worked bore out this idea. “The Nordic countries were very unequal a century ago,” says Carlin. “Then inequality fell dramatically, and at the same time, hours of work fell. People were less interested in comparing themselves with ultrarich people, and so they decided to take more leisure time.”

If it’s not immediately clear how that impacts our lives—and our spending—today, consider that income inequality in the US has worsened dramatically in the past four decades, according to a 2020 report from the Pew Research Center, which remarked that “the wealth gap between America’s richest and poorer families more than doubled from 1989 to 2016” and noted that America’s Gini index (a measure of income inequality) was higher than any other G7 nation. No surprise then that projections for luxury goods sales in the US are rosy.

Insta Effect

There is another element that’s essential to understanding the increasing hold Veblen goods have over us: their visibility. Because Veblen’s theories rely on the perception of others, for anything to be considered a traditional Veblen good, its price—or exclusivity—must be easily understood by others.

This simple fact underpins big-logo luxury products such as a Louis Vuitton monogrammed holdall, the oversize grille of a Rolls-Royce, or the instant recognition of iconic watch designs like the Audemars Piguet Royal Oak.

As Carlin says, “More information intensifies the Veblen effect. On social media there are so many more opportunities to compare yourself with other people.”

It’s a theme taken up by Columbia Business School associate professor Silvia Bellezza, whose paper “Distance and Alternative Signals of Status: A Unifying Framework” puts forward an understanding of how Veblen effects are evolving in the modern age.

“Social media has maximized the communication channels you have, and the impression [of whatever you are flaunting] is realized faster than it used to be in the past,” Bellezza says. “Also, on the manufacturing side, it has given us this idea of product drops. Before you had collections twice a year, then four times a year, then monthly—and now you have basically weekly product drops.”

Social media has also made it easier than ever to know how much things cost. Consider the proliferation of TikTokkers patrolling New York’s diamond district or totting up the dollar value of a celebrity’s cars, jewels, or houses.

The Ugly Truth

Bellezza says that social media’s constant need for newness has been credited with helping to develop alternatives to traditional Veblen effects. “If you’re just wearing another pair of nice shoes, nobody is really going to repost that,” she says. “If you’re wearing a very ugly pair of shoes, that will catch people’s attention.”

Ugly luxury—along with “quiet luxury,” or “stealth wealth,” as well as the rise of vintage goods—is one of the alternative ways in which consumers can now signal their status. It’s still about belonging to an elite, but not necessarily one that’s defined by price. It can be defined by knowledge, connoisseurship, or other socially-valued ideas, like environmentalism or even modesty.

As well as showing you have the outright wealth to buy a Ferrari, you might have chosen to demonstrate your eco-credentials with an EV, or even (when it was newly launched) flaunt your humility in a Prius. And in vintage luxury goods, the Veblen commodity is not just financial but intellectual or cultural.

“Knowledge is a cost that you have to accumulate,” says Bellezza. “If you are buying vintage, it’s really not easy. So you need to have some cultural capital on that specific product to understand which vintage bag is which.”

Stealth wealth and extreme inconspicuousness is also represented, either in the apparently nondescript Issey Miyake roll-neck sweaters beloved of Steve Jobs or Mark Zuckerberg’s purchase of the homes surrounding his own in a quest for privacy (as he rocks his new Patek).

The evolution of status signaling, according to Bellezza, is a direct reaction to changes in the luxury industry, which are the reasons, as she sees it, that some luxury brands have been “losing their luster”—and hence their potency as Veblen goods. It comes back to supply and demand, and the danger of being too available.

“Ecommerce, for example, is a good idea for the short term but not necessarily for the long term. A lot of these luxury brands belong to conglomerates who need to bring short-term results,” says Bellezza. “Oftentimes there’s this tension between milking the brand to boost sales in the current year and the long-term equity of the brand.”

Bellezza highlights “well-behaved” brands like Louis Vuitton, Chanel, Hermès, and Ferrari as “the utmost luxury; there’s no way you’re going to buy Louis Vuitton on sale online. The same with Chanel. A lot of people think that what made Ferrari the ultimate status symbol for luxury cars is the fact that they capped production. Similarly, it’s not that easy to buy an Hermès bag. It’s very difficult to do—they simply just don’t go after the demand.”

“For other brands, there have been factors that allowed them to sell more, and they haven’t resisted the temptation. Modern manufacturing has made it possible even for luxury goods to be mass-produced. With that comes the problem of overstock, and at the end of the season, you sell whatever you haven’t sold at substantial discounts through outlet channels.”

Another issue is the proliferation of counterfeit luxury goods, which in broad terms simply increases the ease with which people can access status signals for lower prices, diluting the appeal and power of the authentic item.

Thanks to the now high quality of fakes—be they watches, bags, or even cars—they function extremely well as status symbols and help to explain why consumers move away from what Bellezza describes as the “traditional upgrading, from one bag to a more expensive one, and so on” into alternative ways of showing status that are about more than superficial logos; the connoisseurship of vintage, or luxuries that go beyond material items and can’t be faked.

“It’s just difficult to know what’s next, but maybe the next frontier is going to be space tourism. The fact that it’s going to be very exclusive at the beginning and hard to get on the price dimension, you can count on it acting as a Veblen good. The fact that Bezos has done it, and now you look at the people who are booking the trips, for sure it fits the profile.”