Impact of Market Events on Consumer Expenditure on Luxury and Mass-Market Watches

Answer

Consumer expenditure on a good is price × quantity at the market equilibrium, so its direction is determined by how the events shift demand and supply and by the relevant elasticities — this is a demand-and-supply question, not a question about firm behaviour. The two markets must be analysed separately, since the events bear on each differently.

Luxury watches

Demand rises. Global recovery raises consumer incomes. As a luxury good, watches have a high income elasticity of demand (YED > 1), so rising income raises demand more than proportionately; growing interest among young consumers (a favourable shift in tastes) raises demand further. Both shift demand right.

Supply rises. Incorporating technology into production (process innovation) lowers the marginal cost of producing luxury watches, raising supply (the curve shifts right).

Effect on expenditure. With demand and supply both rising, equilibrium quantity rises; the price effect of the supply increase depends on the price elasticity of demand. If PED > 1 — likely for luxury watches, which have many substitutes and take a large share of income — the supply-driven fall in price raises quantity demanded more than proportionately, so expenditure rises. Combined with the demand increase, expenditure on luxury watches rises.

Mass-market watches

Demand — two opposing forces. Economic recovery raises income and, with YED > 1, raises demand — but by a smaller magnitude than for luxury watches. Against this, cheaper smartwatches (substitutes) reduce demand: by the cross elasticity of demand, a fall in the price of a substitute (XED > 0) lowers demand for mass-market watches. The net direction is ambiguous and turns on the strength of substitutability.

Resolving the ambiguity. If mass-market watches function partly as accessories, their substitutability with smartwatches is weak (a small XED), so the demand-reducing effect is small. The income-driven rise in demand then outweighs it, and demand rises overall.

Supply — little change. Innovation among mass-market producers is limited, so supply changes little. With demand rising and supply roughly unchanged, equilibrium price and quantity both rise, so expenditure on mass-market watches rises.

Judgement

Expenditure is likely to rise in both markets, but for different reasons and with different confidence. For luxury watches the conclusion is firm: demand rises strongly (high YED, favourable tastes), supply rises (process innovation), and with PED > 1 the larger quantity at a possibly lower price still raises expenditure — further reinforced if the innovation is product innovation, which would raise demand additionally. For mass-market watches the conclusion is conditional on the smartwatch substitution effect being weak; if smartwatches were strong substitutes, demand could fall and expenditure decline. The decisive analytical levers are therefore YED (the size of the income-driven demand shift), XED (the strength of smartwatch competition), and PED (whether a price fall raises or lowers expenditure) — and on the most plausible values of each, expenditure rises in both markets, more assuredly for luxury watches.