Most businesses dream of a product that everyone wants. If demand rises, the obvious response is to produce more, open more stores and sell to as many customers as possible. Luxury brands face a strange problem. If everyone can buy the product, part of what made everyone want it may disappear. For them, satisfying demand too well can sometimes damage demand itself.

This is because a luxury product does more than perform a function. A ₹3,000 handbag and a ₹2 lakh handbag can both carry a phone, keys and wallet. The difference in price cannot therefore be explained by function alone. Economists have long studied conspicuous consumption, where part of the utility from a product comes from what owning it communicates about the consumer. Bagwell and Bernheim's economic model of conspicuous consumption shows how consumers may choose high-priced luxury goods partly because those goods signal wealth and status. In these markets, price is not simply something consumers tolerate in order to get the product. Sometimes the price itself helps create the product's social value.

That creates the possibility of a Veblen effect, named after economist Thorstein Veblen. For an ordinary good, increasing the price should reduce quantity demanded. But for some status goods, a higher price can make the product more effective as a signal precisely because fewer people can afford it. Modern economic research still finds settings in which exclusivity and status can generate this apparently strange relationship between price and desirability. This does not mean every expensive handbag is a Veblen good or that doubling its price will automatically double demand. It means that in luxury markets, the usual negative relationship between price and attractiveness can become much less straightforward.

Once price becomes part of the signal, scarcity becomes valuable too. Imagine that the ₹2 lakh handbag suddenly becomes available in every shopping mall, on every website and to anyone who wants one. Nothing about the leather has changed. Nothing about its ability to hold a phone has changed. Yet something economically important has. The bag is no longer as effective at distinguishing its owner from everyone else. Research published in the Journal of Brand Management finds that perceived rarity can raise the functional, emotional and social value consumers attach to luxury products. Scarcity therefore does not merely restrict how many units a luxury firm can sell. It can change what each unit means.

This helps explain one of the strangest features of luxury strategy: firms can have an incentive to restrict accessibility rather than maximise it. Scarcity can be natural, because a product takes enormous skill or rare materials to produce, or artificial, because the brand deliberately limits quantities, releases limited editions or controls who can access certain products. Researchers studying luxury consumption distinguish between these different forms of rarity and find that consumers react differently to them. The crucial point is that scarcity itself can become part of perceived value. A product that is difficult to obtain can feel more valuable partly because it is difficult to obtain.

Hermès provides an interesting example because its scarcity is not simply a marketing slogan. The company centres its strategy on craftsmanship and says each new leather-goods workshop requires the development and transmission of specialist skills. By the end of 2025, Hermès operated more than 20 leather-goods workshops organised across ten regional centres, and continued investing to expand production capacity. That is an important complication to the usual story that luxury brands simply "create fake scarcity." If production depends on trained craftspeople and time-intensive processes, supply cannot necessarily expand at the speed at which demand does. Rarity can emerge from the production model itself.

Yet a luxury company also has to decide how aggressively to remove that scarcity. If demand exceeds supply, an ordinary firm might expand as quickly as possible. A luxury company has to worry about what rapid expansion does to exclusivity, quality and brand equity. Hermès is increasing capacity, but its strategy continues to emphasise craftsmanship and an exclusive, balanced distribution network rather than unrestricted scale. The economic objective is therefore not simply to sell the maximum possible number of bags this year. It is to maximise the long-term value of a brand whose desirability partly depends on not feeling mass-produced.

Distribution becomes part of the same strategy. LVMH describes control over distribution as a core strategic priority, particularly for fashion and leather goods. Rather than selling everywhere, the group uses a network of exclusive boutiques partly so that it can control its brand image, customer experience and retail environment. By the end of 2025, its fashion and leather-goods brands operated around 2,300 exclusive stores worldwide. Restricting distribution may look inefficient if the only objective is getting products into as many hands as possible. It makes more sense if the shop, service and difficulty of access are all part of what the consumer is buying.

This is almost the reverse of the strategy used in mass-market consumer goods. Coca-Cola benefits from being available almost everywhere. A luxury brand can be damaged by feeling available everywhere. In one market, distribution creates convenience. In the other, excessive distribution can dilute distinction. LVMH itself repeatedly describes its strategy in terms of desirability, quality and highly selective distribution. The scarcity is therefore not always hiding somewhere in a warehouse. It can be built into where a product is sold, how it is sold and who feels able to obtain it.

Limited editions push this logic further. A company can take a product it is perfectly capable of manufacturing again and decide that only 500 will exist. Economically, this looks like voluntarily giving up potential sales. But artificial scarcity can increase urgency and willingness to pay. Research on luxury products has found that perceived scarcity can strengthen consumers' willingness to pay, while other studies show that limited availability can act as a signal of uniqueness and luxuriousness. By restricting quantity, the firm may sacrifice some volume while increasing the perceived value of every unit that remains.

There is, however, a delicate line between scarcity and frustration. A product that is impossible to obtain can eventually stop feeling desirable and start feeling irrelevant. Research on luxury scarcity also finds that not every form of artificial exclusivity increases value, and that consumers distinguish between genuine rarity and scarcity that feels manufactured. This gives luxury firms a difficult optimization problem. Supply must be limited enough to preserve desirability but not so limited that customers simply leave. Scarcity has to create aspiration without creating abandonment.

This also helps explain why discounting is dangerous in luxury in a way it is not for an ordinary retailer. A supermarket can put cereal on sale without permanently changing what cereal means. A luxury company repeatedly discounting a handbag risks teaching consumers that its supposedly exclusive price was negotiable all along. If high prices help signal exclusivity, aggressive discounting does more than reduce revenue per unit. It can weaken the signal itself. Luxury firms therefore face an unusual incentive to protect price even when reducing it could increase short-term sales.

The result is a business model where some of the traditional rules of growth become inverted. More customers are normally good. More stores are normally good. More production is normally good. Lower prices are normally good for demand. Luxury strategy asks a different question: at what point does more begin to make the product worth less? The answer depends on the brand, but the existence of the question itself separates luxury economics from ordinary retail.

Perhaps this is why the most valuable thing a luxury company sells is not leather, gold or even craftsmanship. It sells distinction. Craftsmanship and quality give the product substance, but scarcity, controlled distribution and price help determine how widely that distinction can be shared. A brand therefore has to perform a peculiar balancing act. It must be famous enough that everybody recognises what owning it means, but scarce enough that not everybody can own it.

That is the real economics of luxury. Most companies respond to demand by trying to eliminate scarcity. Luxury companies sometimes preserve scarcity because scarcity is part of the demand. The price tag is not merely the obstacle standing between the consumer and the product. Sometimes it is part of the reason the consumer wants to cross it.

Sources

  • Bagwell and Bernheim, "Veblen Effects in a Theory of Conspicuous Consumption," NBER Working Paper — nber.org
  • Research on status goods and price signaling, Review of Economic Studies — academic.oup.com
  • Research on perceived rarity and luxury value, Journal of Brand Management — link.springer.com
  • Hermès, corporate strategy overview — finance.hermes.com
  • LVMH, 2025 Universal Registration Document — urd.lvmh.com
  • LVMH, "Solid Performance in a Disrupted Global Economic and Geopolitical Environment" — lvmh.com
  • LVMH, "LVMH Achieves a Solid Performance Despite an Unfavorable Global Economic Environment" — lvmh.com
  • Research on perceived scarcity and willingness to pay in luxury markets — sciencedirect.com
  • Research on natural versus artificial scarcity in luxury consumption — sciencedirect.com