Why Do People Spend Thousands on Luxury Bags? A Signaling Theory Perspective

Have you ever noticed people carrying luxury brand bags on the street or subway, such as LV, Gucci, or Chanel?

If you value practicality, durability, and cost‑effectiveness, these bags are not your first choice and are unaffordable for most.

This article analyzes why some individuals are willing to spend tens of thousands of yuan on luxury bags by applying the signaling model .

Conspicuous Consumption

Luxury bags serve more than functional purposes; they are used to highlight status, wealth, or taste, a behavior known as conspicuous consumption . Thorstein Veblen first introduced this concept, noting that people buy expensive, non‑essential items to display social standing.

The high price itself acts as a barrier, preventing those without sufficient means from joining this consumption group.

Thus, an expensive brand bag functions as a social signal conveying information about the owner’s wealth and status.

What Is the Signaling Model?

The signaling model studies how individuals transmit information under asymmetric information, a tool from game theory.

The basic assumption of the signaling model is that one party (the signal sender) possesses more information than the other party (the signal receiver), who must infer based on the sender’s actions.

In our example, the person carrying a luxury bag (signal sender) knows their wealth, while observers (signal receivers) cannot directly observe it. The bag becomes an observable signal of hidden wealth.

For a signal to be effective, two conditions must be met:

Costliness : The signal must be costly to send; higher cost increases credibility. Wealthy individuals can afford the expense, whereas ordinary people cannot.

Distinguishability : The signal must differentiate between types of individuals. Luxury bags create a clear divide between those who can bear the cost and those who cannot.

Structure of the Signaling Model

Consider two consumer types:

Wealthy consumers (F) : Sufficient wealth makes the cost of a luxury bag relatively low.

Ordinary consumers (P) : Limited wealth makes the cost high.

Let the bag’s price be \(p\), the psychological cost for wealthy consumers \(c_F\), and for ordinary consumers \(c_P\) (with \(c_P > c_F\)). The benefit from purchasing, representing social recognition, is \(b\).

The model seeks an equilibrium where consumers decide whether to buy. Three possible equilibria are considered:

Pooling equilibrium : All consumers purchase the bag when the price is low and the benefit high, eliminating the signal’s distinguishing power.

Separating equilibrium : Only wealthy consumers purchase because the cost for ordinary consumers exceeds the benefit, preserving the signal’s discriminative function.

Partial pooling equilibrium : Wealthy consumers and some ordinary consumers purchase when the price lies between their willingness‑to‑pay thresholds.

For example, if the bag costs 10,000 yuan, the wealthy consumer’s cost is 5,000 yuan, and the ordinary consumer’s cost is 15,000 yuan, only the wealthy consumer will buy, illustrating a separating equilibrium.

Broad Applications of the Signaling Model

The signaling model explains not only luxury‑bag consumption but also many social phenomena where costly signals convey information:

Education : High academic credentials signal perseverance and ability.

Financial markets : Companies release financial reports and dividends to signal strong performance.

Marriage market : Individuals use appearance and behavior to signal health and personality traits.

Luxury brands understand the signaling effect and often maintain high prices or limit supply to enhance the signal’s strength, ensuring that only those who can afford the cost can use the product as a wealth marker.

While such conspicuous consumption can yield social benefits for individuals, it also raises fairness concerns and resource waste, as those lacking the means may be disadvantaged in social competition.