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China is known for malinvestment . Its consumption habits are also pretty
dodgy
Jun 23rd 2012 | from the print edition
MOST shop windows proudly showcase what can be bought inside. The window of the
Silk Street Market, a touristy shopping centre in Beijing, is a bit different.
It displays a pair of official notices advertising what cannot be bought
inside. These non-offerings include luxury brands such as Prada, Louis Vuitton
and Burberry. The notices are meant to save customers from buying fakes
unwittingly. But many still buy them wittingly. You could almost say that
counterfeits remain Silk Street s trademark, despite the market s efforts to
stamp them out. On the ground floor, a purple Paul Smith polo-shirt from a
Guangzhou factory was offered to your correspondent for 1,285 yuan ($200), a
price which eventually fell to 150 yuan. It is not easy to walk away from such
bargains. Especially when the stall holder will not let go of your coat.
Economists and policymakers around the world want China to consume more. They
are eager for it to reduce its dependence on investment, which amounted to
almost half of GDP last year. No economy that invests so heavily can possibly
invest it all wisely. Economists therefore worry about a widespread
misallocation of capital, or malinvestment . But some of China s consumption
is also a bit questionable.
Fake goods are rife. Researchers once stopped every fifth person in a Shanghai
mall and asked them about their buying habits. Of the 202 who completed the
survey, almost three-quarters admitted to buying knock-off luxury goods. The
resulting paper* by Ian Phau and Min Teah of Curtin University of Technology in
Australia was titled Devil wears (counterfeit) Prada . Some people buy luxury
brands as an act of self-expression. Others buy them as an act of social
emulation. They want to wear the same brands as the people they aspire to be.
The Chinese are more likely to be this second type of buyer, according to
Lingjing Zhan of Hong Kong Polytechnic University and Yanqun He of Fudan
University. And, other studies suggest, such status-seeking consumers are more
likely to buy counterfeits.
A Prada handbag is a bundle of two things: a well-made product and a
well-marketed brand. But some consumers value prestige, not quality. Fakes
allow shoppers to consume the prestigious brand without buying the
high-quality good, as Gene Grossman of Princeton and Carl Shapiro, now of the
University of California, Berkeley, pointed out in a seminal 1988 paper. This
unbundling no doubt drives Prada and others mad, but it would seem to be a boon
to consumers.
Or is it? As Messrs Grossman and Shapiro also point out, a luxury brand confers
status only because it is exclusive. It has to be widely popular but not
widely accessible , as one marketing professor puts it. People who buy Prada
are paying for exclusivity. The devils who wear counterfeit Prada erode that
exclusivity, imposing an externality on owners of the genuine article.
As counterfeiters rush to replicate a brand, the brand owners fight to
distinguish themselves from the fakes. In a recent paper, Yi Qian of Kellogg
School of Management studies the response of branded Chinese shoemakers to an
influx of fakes after the government shifted its enforcement efforts to more
urgent things, such as stamping out counterfeit food, drugs and alcohol. Many
shoemakers reacted by improving the quality of their footwear, importing
Italian pattern-pressing machines and using pricier materials, such as
crocodile skin. Their response contradicts the popular notion that fakes
inhibit innovation and investment. But firms also raised prices by more than
was warranted by their extra costs. Buyers of fakes therefore impose a cost on
people who want to buy the real thing. They make brands less exclusive or more
expensive.
But it is possible that buying genuine luxuries imposes an externality of its
own. Status, after all, is a positional good. To be top of the social heap,
it is not enough to have fine things. Your things need to be finer than
everyone else s. Someone who buys a more expensive watch or car to climb up the
social ladder forces other social climbers to spend more to stay ahead. In
making their purchase, they will carefully weigh how much prestige their big
spending will buy. But they will not take into account how much extra everyone
else will now have to spend to preserve their social position. As a result of
these arms races , China may be overspending on luxury goods. Its shoppers
account for only 6% of the world s consumer spending, but, according to figures
released by Bain Consulting last month, they now account for 20% of global
sales of luxury goods.
Sympathy for the devil
These wasteful status games are not confined to China s finely dressed elites.
In China s villages, people cement their position in the local pecking order by
hosting expensive weddings, funerals and other ceremonies for their own family
and buying costly gifts for other people s. Xi Chen and Ravi Kanbur of Cornell
University, and Xiaobo Zhang of the International Food Policy Research
Institute, have studied the gift-books kept by households in 18 poor villages
in the mountains of Guizhou, a southern province. They found that the poorest
households (those living on less than $1 a day at purchasing-power parity)
spent about 30% of their budgets on gifts and festivals, twice as much as
similarly impoverished Indians. When a household enjoyed a sudden windfall such
as compensation for requisitioned land they would spend more, forcing everyone
else to keep pace. Economists fret that Chinese investment is marred by
wasteful prestige projects, orchestrated by local bigwigs seeking to outdo one
another. Perhaps its consumption is not that different.
Sources
"Devil wears (counterfeit) Prada: a study of antecedents and outcomes of
attitudes towards counterfeits of luxury brands", by Ian Phau and Min Teah.
Journal of Consumer Marketing 26/1 (2009)
"Understanding luxury consumption in China: Consumer perceptions of best-known
brands", by Lingjing Zhan and Yanqun He. Journal of Business Research, in press
"Why do consumers buy counterfeit luxury brands?", by Keith Wilcox, Hyeong Min
Kim and Sankar Sen
"Foreign counterfeiting of status goods", by Gene Grossman and Carl Shapiro,
1988
"The impact of counterfeiting on genuine-item consumers' brand relationships",
by Suraj Commuri
"Brand management and strategies against counterfeits", by Yi Qian, 2012
"Peer Effects, Risk Pooling, and Status Seeking: What Explains Gift Spending
Escalation in Rural China?" by Xi Chen, Ravi Kanbur and Xiaobo Zhang. IFPRI
Discussion Paper December 2011
Economist.com/blogs/freeexchange
from the print edition | Finance and economics