InvestorQ : What is the Lipstick Effect in Economy?
Katherine Gonsalves made post

What is the Lipstick Effect in Economy?

Answer
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Crowny Pinto answered.
11 months ago


It is one of the many fancy concepts in the world of economics. The Lipstick Effect is actually based on the theory that when facing an economic crisis or if the economy is in a recession/slowdown then consumers begin to tighten their belts. That means; they will be more willing to buy less costly luxury goods. This is a very important point in consumer behavior when it comes to shopping for luxury brands.

Why is this theory important? It is important because it shows that people who are used to buying high-value luxury goods will not stop buying these goods. Instead, they may look for more value for money even in luxury purchases. This has two implications. For example, if a person was buying an Armani T-shirt they may switch to a Tommy Hilfiger but not to a local brand. The other interpretation is that consumers may begin to become harder bargainers even in the case of luxury products. In high-end cities like Singapore and Hong Kong, many high street retailers design their discount sales around the time when consumer confidence is low so that it gives an image of value for money. The underlying implication is that consumers will buy luxury goods even if there is a crisis but they will not go overboard.

However, this Lipstick Effect is more based on observation and intuition than on empirical research. Economists who have tried to look at empirical data to ratify this theory have concluded that the Lipstick Theory is not proven by data. So, you have to take it with a pinch of salt.