As the weather has been changing for the better, I have been on a regular shorts hunt recently. Picky as I am, I have been browsing through many shops in order to find the ideal pair to be included in my summer apparel wardrobe. During my search, I stumbled upon something my inner economist found peculiar: the price of so-called ‘designer denim shorts’; many of which lie in a price-range of AUS $150-250(!). Since denim shorts roughly consist of half the amount of fabric that a pair jeans do, one could rationally assume the price would reflect this. Seeing as this is clearly not the case, why exactly is it that designer denim shorts are so expensive?
Many apparently ‘obvious’ reasons as to why designer clothing is more expensive than the alternative generic brands initially come to mind. Often, I have heard: “designer clothes are equal to prestige and exclusivity”, “they provide a better fit”, “the quality of the materials is higher”, “remember that much time is spend on the innovation and designing process” etc. And while there is most definitely some truth to all of those statements, I would like to argue that other factors also contribute to the price in this case. After all, denim is denim and there is only so much that you can do with the design of shorts.
We are dealing with a standard market. The designer firms wish to make profits (and attempt to maximize these) by delivering goods we want to buy and we, individuals, simply want to maximize our utility. By applying more market theory, the answer to my posed question is simply that the reason these shorts are set at the price they are, is because the consumers’ marginal willingness to pay for them equals or exceeds their value (marginal benefit > price). Thus, the interesting question now becomes: what utility is it that consumers derive from denim designer shorts? And why is their willingness to pay is so high?
Appearance and being fashionable explains some of it. For example, men who wish date attractive women would be very interested in increasing their ‘purchasing power’. By wearing more expensive, designer clothing it could be argued that men improve their physical appearance and thus signal a higher ‘value’. As designer clothes do signal values like prestige and exclusivity, they do send a clear message to potential dates: I am wealthy and fashionable. Since women generally regard men with higher incomes and higher social status as more desirable marriage partners, men can take advantage of this signaling and consequently their marginal willingness to pay for designer shorts rises.
Another reason relates to the pursuit of happiness. While it has been proven that being rich does not necessarily equal being happy (e.g. due to the fact that our expectations and aspirations adjust over time and higher relative income), having certain positional goods, to some, are important for a general sense of self-value and level of contentment. Some people simply feel happier if their relative position to others is better. Unfortunately, a relative position implies that you can only get ahead if somebody else falls behind. As consumption is important in relation to relative position, people wishing to have this ‘higher’ status must continue to buy designer clothing. This again affects the willingness to pay.
Lastly, I think it can be argued, through an oversimplified example that the designer companies try to create scarcity in the minds of the consumers through advertising. The different labels are in need of some degree of market power to actually sell their products at above normal profits. They achieve this by differentiating themselves by means of prices, design, advertising etc. The reason this differentiation process is so important is because, if excluded, shorts could be categorized as a fairly homogenous product.
Say it as it is: shorts are shorts. The problem for the different labels arises if consumers were to think this way. The supply of denim shorts is great and consequently Design Shop A would quickly lose all of its customers to Generic Shop B because of the latter’s lower prices. According to Ricardo, a bidding war would start between the shops selling denim shorts driving the price down to where price equals marginal costs i.e. no economic profits.
Therefore, the labels try to create a perception of premium value and, to an extent, a sense of scarcity through proactive marketing efforts essentially saying: “There is only one company that delivers (e.g.) Diesel Shorts and these are worth much more than the next best alternative”. These branding efforts create the perception of premium associated with the product in the mind of consumers. Consequently, the designer products become price inelastic and the designer companies are able to capitalize on this by reaping above normal profits.