This blog contains posts and comments written by students in Dr. Tufte's economics classes at Southern Utah University.
10/14/2007
A Burst of Speed at Lamborghini
This article shows how Lamborghini has created brand loyalty for their cars and increased demand for them. Audi bought them out and poured in money to increase production and reliability on Lamborghini’s line up. This has made a more favorable reputation for the cars. They have also doubled the number of showrooms since 1998. The result is increased demand for their cars that has helped them create a desired shortage. This helps keep the price up on their specialty cars.
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7 comments:
Technically, this isn't a shortage. That is a case where there is excess demand at a given price.
Just because there is a waiting list doesn't imply a shortage. Being on the waiting list is part of the price of the car. My guess is that if Lamborghini could ramp up production to convert that waiting list into people who would pay a premium to get their car sooner, I think they would.
My fear for Lamborghini is that they have created their own high demand, high price, low output situation. Whether it was intentional or not, a Lamborghini of any model, style, color, etc, will always sell for more than most other cars. Why is that? Exclusivity.
A Lamborghini is a rare thing to see on the street because there are so few of them available and they are so expensive. Thus, only elitists can afford them. The question is what came first the high price or the high demand.
I propose that they created the high demand by building an awesome vehicle mechanically, then made it look as hot, sporty, and sexy as possible. A quality product itself can demand a high price as long as it is desired by the consumers. Then they made them scarce by only selling so many, which also raises the price.
I propose that by now offering them in higher quantities will make them less novel and the price will go down. Now this a good move for the company since the margin on the few they sold was not enough to sustain them financially. However they cannot expect to sell the same product in much larger volumes than they have in the past and expect the price to stay as high as it was.
Does this mean that I can afford a Lamborghini in the next few years? Not hardly. But as more and more people buy them, the luxury of owning them will become more commonplace and the elitists will eventually look for another product to satiate their fanciful taste buds (like the Bugatti).
I think Lamborghini is very good at competing in what I think is a market of monopolistic competitors. There are relatively few competitors trying to differentiate their product from one another's even though when you boil it down, they are all just very fast and attractive cars. The manufacturers of these cars want there to be a percieved shortage in the market so that they can sell them at whatever price they deem necessary to give the proper returns back to their shareholders.
It is interesting how this article discusses how willing people are to wait to receive a Lamborghini. People are not only willing to pay a premium price for this type of car, but then they are also willing to pay with their wait time as well. I wonder if Lamborghini does any studies on how long of a waiting period buyers would be willing to accept before it became a deterrent to purchasing this type of car?
Dr. Tufte said that Lamborghini has not created a shortage, but an excess demand at their given price. The price is even higher because the customers have to “pay” in time spent waiting. Maybe Lamborghini should increase their price to get some of that pay being wasted on time. Also, with as profitable as Lamborghini is, one would think that they would invest the money into more and faster production. Since they aren't, it makes me think that having that wait time increases the demand and prestige of their brand.
Matthew: this is an area of ongoing research that we really haven't figured out yet.
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