Problem 12 (Pricing of Luxury Goods) Bonus Question (6 points) For years luxury

Question

Problem 12 (Pricing of Luxury Goods) Bonus Question (6 points) For years luxury goods are priced between 25% and 40% higher in China than in Europe excluding tax. However as more Chinese customer travel overseas and have access to internet, Chinese consumers are shifting their purchases of luxury goods from within China to overseas to take advantage of the more affordable prices. As a result, luxury sales within China fell 1 1% in 2014, but similar purchases made by Chinese consumers overseas grew by 9%. You are hired as an Economist by the world's largest luxury company, LVMH, to help determine its pricing strategy in China to recover revenue. What would you recommend? (Optional Reading 3- Luxury Goods, WSJ, 6/13/2015)

Explanation / Answer

Demand for luxury goods tends to be elastic.

If demand for a good is elastic then increase in its price leads to decrease in total revenue and decrease in its price leads to increase in total revenue.

Since, demand for luxury goods is elastic, firms selling luxury goods should decrease the price if they want to increase the total revenue.

So,

We would recommend the LVMH to decrease the price of their products sold in China and bring them in line with the prices outside China, this will enable the LVMH to increase sales and revenue.

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