Although most of the professors around the most prestigious universities of the world continuously force incipiently knowledgeable economics students to learn the “common assumption” that goods and services have a demand curve that is sloped down*, the power of price as a strategic tool for communicating quality can completely change the way we think about price change effects on the willingness to buy of the consumers. In these particular cases, the benefits of communicating a powerful value such as luxury for a product by setting prices higher, outweighs the costs of having some price sensitive customers not buy anymore from the brand since the price is now higher. In other words, the increase of demand because of the luxury communicated by the increase in the price outweighs the decreases in demand because of the price sensitive buyers. Furthermore, the loyal and common customers of these markets generally are very price insensitive since their income levels are very high.
*as a price of a product decreases the consumer is more willing to buy it and vice-versa.
The Caribbean cruise market, jewelry market, and several other markets are mostly characterized by this exception of having the demand curve shaped in a way where as prices increase to a certain point, quantity demanded also increases.
Can you think about any other products that would also have the same demand curve shape or that would not be the conventional shape? What are the implications for pricing strategies for companies and for the society as a whole?
If you are interested in understanding more about this phenomena read about the Giffen Behaviour at Dani Rodrik`s Blog.
If you wish to read more about the downward sloping demand curve find some interesting insights at: Peter Coffee`s Blog
