A “Luxury goods” have impact that goes beyond marketable value, covering emotive and symbolic features (Hudders, L.2012), Rolex has shown beyond expectations how luxurious it is. Rolex is one of the world’s leading trends in wrist watch industry, it is said to be No.68 on Forbes list of world’s most powerful global brand and ranked No.1 as the most reputable company that wholly produces a consumer product (Forbes.2014). The brand was founded by Hans Wilsdorf and Alfred Davis (1905) in London, England before it relocated to Switzerland in 1919 and as one of the largest single luxury watch brand it designs and produces about 2000 watches per day (Rolex,2014). This essay will however emphasize on what factors determine the price of a Rolex and logically explain with sourced evidence.
Firstly, Rolex is one of the most cautious, successful and most standardized brands in the world, it produces its watches with the finest, precious and most expensive materials (Gold, Silver, Diamonds, Ceramic, Stainless steel, Precious stones etc.) which has been meticulously designated and regularly reassessed to warranty its performance and its flawless aesthetics (Rolex,2014). According to sources Rolex is said to have the largest consumption of gold in Switzerland and in average the price of gold increases by 14.4% every year, in 2013 it increased from -29.4% to 2.8% in 2014 and the prices fluctuates every day as gold is an example of a luxury good which has boosted the price of a Rolex (The Journal, 2013). It’s also the only brand that does its own alloying and by doing so it has managed to maintain a full uniqueness and having a high control of its quality, with such a rare and unique quality the demand for a Rolex is relatively high due to consumer’s choice of owning an exclusive product, in the market economy high demand leads to an increase in price so this has an impact on why the price of a Rolex is high.
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The price of a product is majorly determined with a mechanism which involves supply and demand; in this case the price of a Rolex is determined by supply side factors and demand side factors because the supply is said to be below its market equilibrium which results to a shift of the demand curve to the right and creating its high increase in price. Rolex is a monopolistic competitor, it produces its goods to be differentiated from its competitor’s product, and therefore it is a price maker which allows the firm to place the price of a Rolex above market level to interest the consumer surplus. So doing, the firm being a price maker qualifies it of being a profit-maximizer as output increases only if its marginal revenue is greater than its marginal cost (Sloman.J, 2010) .
The price of a Rolex is significantly higher, and its target market is one of extremely wealthy once, due to limited purchasing power most consumers have a budget restraints as indicated by a budget line, as consumers will only want to spend at their budget line and based on their preferences. Most customers are potential buyers and have a higher budget, if it is said that all individuals are utility maximisers then their purchasing power will lead to increasing the utility of those consumers who behave in a logical manner (Pindyck and Rubinfeld, 2008) , as wealthy people have a lower budget constraints they are able to afford an expensive Rolex watch. With this theory, the retailers will take it into account to try and capture any consumer surplus by increasing the prices of their good. A Rolex watch can also be classified as a normal good, which means an increase in income can increase the demand of a Rolex meaning it has a positive YED because the change in price will have a significant change in the demand making it inelastic letting Rolex to increase its price due to an increase in demand being more significant than the actual price.
A Rolex watch is said to be 2nd in the top five investment luxury watch in 2013 (ACL90210, 2013), since watches made in the 80’s and 90’s can be used as an investment item the most expensive Rolex watch is worth $1.16 million a 1942 Rolex Chronograph (BBC News,2013), it is expected that the marginal utility is unlikely to diminish for this product regardless of how many goods are purchased and this has an advantage in why the price of a Rolex remains high. It is also a long term asset, and because of this fact demand is increased and further allows the sellers to increase the price. The interest of consumers who are willing to invest in this Rolex watches, in a watch auction the highest bidder gets the watch rather than getting it in its normal fixed price in this case it shows that the highest bidder will be willing to pay more and also leading to an increase in demand (consumers surplus), but this only happens in the short run and it is possible because of this reason the price is still high.
A major problem for Rolex as a price maker is that there are other brands who are placed in the same category (competitors) in term of quality, style and price such as Hublot, Omega, IWC etc. These are substitutes for Rolex , in favour of Rolex they best not place there prices way too high because of their competitors and also not to set buyers interest off. All put together, Rolex determines its price based on all factors of production as all other brands determine their prices, considering its uniqueness and quality and also determine the prices of its competitors as an indicator for how much it will be placed at . With a mechanism concerning various factors of supply-demand and the ability to capture its target market ( the wealthy) consumers surplus and aptitude to stand as a long- term investment product it is able to increase price and allows them to maximize their profits without being unfavourable to the interest of its prospective buyers.
In conclusion, Rolex has a strong market power using credible threats to coerce its retailers and suppliers also practices retail price maintenance. The importing and exporting also increases price as government place tariffs on this goods, in the international trade the currency exchange rate may also determine the price of a Rolex for a country that is importing this goods. Overall the price of a Rolex is presumably well above its marginal cost so however prices still remains high.
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BBC News, (2014). Why do we value gold?. [online] Available at: http://www.bbc.co.uk/news/magazine-25255957 [Accessed 10 Jun. 2014].
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Pindyck, R & Rubinfeld, D (2008) Microeconomics Seventh Edition. Pearson Prentice Hall. [Accessed at: 12 May 2014]
Rolex, (2014). Discover more on Rolex.com. [online] Available at: http://www.rolex.com/ [Accessed 22 May. 2014].
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