George Bernard Shaw enjoyed telling the story of Count Leo Tolstoy to illustrate his argument that the public does not appreciate what it does not pay for. According to the story, Tolstoy put into the public domain the copyrights to his works as a gesture to mankind, unintentionally causing an immediate decline in the sales of his books. This story captures a common market phenomenon: the demand for certain goods increases with price up to a certain point. Examples of goods for which demand curves do not slope downward are abundant. High-end fashion manufacturers often adjust prices upward to maintain the luxury status of their brands. For consumers of fashion houses like Louis Vuitton, Burberry, or Miu Miu, high price is part of the product’s allure. It confers exclusivity and prestige. In 2002, Tiffany began aggressively raising prices of its profitable silver jewelry lines in order to preserve its image as a high-end, luxury jewelry maker. Tiffany’s executives were concerned that the popularity of its inexpensive lines of silver jewelry among middle-class shoppers would alienate its lucrative clientele of wealthy luxury consumers. Wine is another example of a product which demand climbs with its price, up to a certain point. Similarly, some colleges have discovered that they were losing applicants when the tuition was low and attracting more qualified applicants when tuition is high.
Many manufacturers use high prices to acquire and maintain a luxury image, utilizing various business schemes to preserve the high level of their prices and prevent the appearance that their products can be purchased at bargain prices. One of the simplest schemes to accomplish this goal is resale price maintenance (“RPM”). In June 2007, the Supreme Court, divided 5-4, handed down its decision in Leegin, reversing the almost century old per se prohibition against RPM established by Dr. Miles (1911).
View entire article in PDF format here.