Subjective value and pricey jeans

Some jeans cost more than $300. Where does the high price come from?

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    A shopper looks at inexpensive Levi jeans at Costco in Mountain View, Calif., Monday, June 13, 2011. Some high-end jeans cost more than seven times as much as they cost to make.
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The Wall Street Journal‘s Christina Binkley asks, “How Can Jeans Cost $300?” After all, “It costs about $50 to make a pair of Super T jeans, True Religion’s best-selling style with oversized white stitching,” Binkley writes. The jeans fetch $152 a pair wholesale, and average $355 retail.

Binkley writes,

The answer can be found here in Los Angeles, in the global capital of so-called premium denim—one of the few areas of fashion that remains largely American-made. An industrial zone here near the city’s center is home to True Religion, J Brand, Seven For All Mankind and other pricey denim brands that have elevated what was once workman’s togs to a luxury industry all its own.

But the real answer is that prices are set by consumers’ subjective values. The value of products does not reside objectively and intrinsically in the goods themselves, apart from the individual who is making an evaluation. “His valuation is a subjective matter that even he cannot reduce to objective terms or measurement,” explains Thomas Taylor in An Introduction to Austrian Economics.

If a consumer spends $355 on a pair of jeans the only thing we know is, that particular consumer values the jeans higher than $355 at that moment.

Like any good, the production of jeans requires inputs from a number of different suppliers. No one could create and manufacture all the components to a pair of jeans.

Binkley writes,

As with all fashion, a big part of the price of luxury denim is in the multiple profit margins taken at each level of production. Most any piece of clothing contains parts and services from potentially dozens of providers: from fabric and button makers, to designers and seamstresses, and wholesalers and sales agents. After all this, designers and retailers say the typical retail markup on all fashion items, including jeans, ranges from 2.2 to 2.6 times cost.

The marketing costs are high to convince the young and hip to splurge on jeans. Binkley points out the high-end denim market was thought dead a couple years ago. So while True Religion is moving 4 million units for the moment, consumers are fickle and they decide what goods can be priced at.

True Religion’s Jeff Lubell says he could price his jeans at $40 if he manufactured in China instead of Los Angeles.

When the easy money stops, he may have to think about that option.

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