Game theory applied on Luxary Goods

,,Ninety-nine percent of this game is half mental" ,says Lawrence Berra. Game theory is most often described as a branch of applied mathematics and economics that studies situations where players choose different actions in an attempt to maximize their returns. The essential feature, however, is that it provides a formal modelling approach to social situations in which decision makers interact with other minds.

Game theory extends the simpler, optimization approach developed in neoclassical economics. Although some game theoretic analyses appear similar to decision theory, game theory studies decisions made in an environment in which players interact. In other words, game theory studies choice of optimal behavior when costs and benefits of each option depend upon the choices of other individuals. Competition is such a game and it relates to the act of striving against another force for the purpose of achieving dominance or attaining a reward or goal. Competition, causes commercial firms to develop new products, services, and technologies. This gives consumers greater selection and better products. The greater selection typically causes lower prices for the products compared to what the price would be if there was no competition or little competition Eventhough prices for luxury goods are pretty high,so is the competition in this market. It takes years to develop a luxury brand and once attained, the real competition begins. Of course,with the luxury brand comes the designer label which refers to clothing and other personal accessory items sold under an often prestigious marquee which is commonly named after a designer.

Moet Hennessy Louis Vuitton S.A. usually shortened to LVMH, is a French holding company which produces luxury goods. It is the parent of around 50 sub-companies that each manage a small number of prestigious brands. The child companies are run, to a large extent,autonomously. The group was formed after mergers brought together champagne producer Moet et Chandon and Hennessy, a leading manufacturer of brandy. In 1987, they merged with baggage manufacturer Louis Vuitton to form the current group. The CEO and Chairman of this group is Bernard Arnault. PPR is also a French multinational holding company specializing in retail shops and luxury brands. The company is headquartered in Paris and is run by its founder, billionaire businessman Francois Pinault. It was originally called Pinault-Printemps-Redoute, but changed its name on 18 May 2005 to simply PPR. On June 20 2006, PPR annouced that it had entered into exclusive negotiations pertaining to the sale of France Printemps after receiving a joint offer from RREEF and Borletti Group for EUR1.075 billion.

Competition is what keeps the market going, but surely this is not easy when talking about luxury goods. When income increases, the demand for these products increases more than proportionally, thus obtaining a high income elasticity demand. This also means, however, that should there be a decline in income its demand will drop. It must be noted, though, that income elasticity of demand is not constant with respect to income, and may change sign at different levels of income. That is to say, a luxury good may become a normal good or even an inferior good at different income. The LVMH and PPRs' manufactured products attained the status of "luxury goods" due to their design, quality and stylish appearence that are remarkably superior to the comparable substitutes. Also,these products are perceived as luxurious by the public because they play a role of status symbols as such goods tend to signify the purchasing power of those who aquire them.In this situation, making a perfume more expansive will make its sales go up rather then going down. These conglomerates are not only about perfumes,but include also haute couture clothing, accessories, luggage, wine, and even chocolate.

The luxury goods business is influenced by world economy. Thus, after the 11th September attack, the industry had to suffer. With rich people not flying, weakened currency and stockmarkets going down, sales of expensive jewellery, watches and handbags--the products that make the juiciest profits for the big luxury-goods groups--dropped sharply. But have all these loses made a long term impact? As John Nash said "In competitive behaviour someone always loses" , some profits went down for e period, rapidly swifting back up as the super-rich are still untying their purse strings for the right products and, what's more, these consumers are increasing in number all the time. More significantly, though, there is a new type of luxury-goods consumer who promises to expand the market dramatically. Typified by the characters in the TV comedy "Sex and the City", these consumers are in effect democratising luxury, says Michael Silverstein, a consultant with the Boston Consulting Group who is writing a book on the subject. He defines the phenomenon as: "the selective trading-up of middle-market consumers to higher levels of quality, taste and aspiration". And