Grey Swan

Half Sigma has an interesting post about distressed jeans being trendy. He notes that distressed jeans are significantly more expensive than new jeans, and consequently cannot be bought by everyone. In essence, they are a way of broadcasting to the world ‘I am wealthy*’. This is quite similar to the upper middle class’ obsession with luxury cars. While a BMW generally has more horsepower and gadgets than your average Nissan, it is functionally identical. Yes, you can speed down the highway a little easier in the Beamer, but most of the car’s value comes from other people knowing that you have it. This is not some contemporary idiosyncrasy. Historically, it was considered ‘high class’ to be pale. This showed that you did not have to spend time outside laboring in the fields. In most of the world, being pale is still a status symbol. In the West, being tan is now admired because it shows you have enough free time to head outside and enjoy the sun.

You can argue that price is all determined by supply and demand, and it is. But what is the reason for demand? In this case – Status! What is slightly disturbing about this is that status is a zero sum game. If you move up a notch, by definition, someone else must move down. Consequently, a large amount of resources are spent on competition that does not benefit anyone. It is a reversed free rider problem. People spend resources that they would not have to if they could sit down and come to an agreement. I believe realizing that status (and distressed jeans) are zero sum has at least two important implications.

1. It is one factor in the spiraling price of luxury goods (A Blog on this expansive topic tomorrow)
2. It may help us predict how the market will react to certain items. For Example, we should not discount an item because it seems so expensive (such as a 1000 dollar martini with a 300 dollar jewel on the bottom of the glass). An item that is overpriced, but whose price gives public recognition to its purchaser may not in fact be overpriced**.

I know that identifying status as zero sum is not new, but I believe that it has important implications when mixing with globalization (because the number of people better off than you seems to increase).

* The best argument illustrating how a high price can feed higher prices is…college. A certain school (whose name eludes me) was suffering declining applicant rates. In order to reverse this trend, said school raised their tuition in line with the Ivy League. The next year their applicant pool increased. Why? Because people searching for colleges saw the high price tag and assumed it had to be good place. The higher price made it less accessible yet more desirable. This is very important as it suggests that college is (to some extent) also a zero sum game.

** Also, indirectly: Consider a world where two companies both produce one type of nail clipper, and sell it for two dollars. One of the companies could simply repackage one of these nail clippers and sell it for more. This way, it would have two identical, differently priced products. Many people would believe that the more expensive nail clippers were better, and choose them.