Yyou could spot a fake from a mile away. The tacky “Prado” wallets arranged on the sheets on the sidewalks along Canal Street in New York bore only a passing resemblance to the wallets on sale at the Prada store in Soho. The fake Chanel bags they were lying next to were lumpy, misshapen and smelled slightly of gasoline. An attempt to make a quick buck by buying one and passing it off as real – perhaps by taking it to a small local consignment shop – would have been met with raised eyebrows and a chuckle.
What an innocent time. Now, growing demand, technological improvements and sheer opportunism have transformed the market for buying and selling luxury bags. lvmh, a luxury conglomerate, sold approximately €10 billion worth of leather goods in 2013. In 2023 it sold for €42 billion – an increase of 320% in just ten years. (By contrast, the global economy grew by just 30%.) Specialty resale platforms, such as RealReal and Vestiaire Collective, have grown rapidly. Revenue from the resale of luxury bags and clothing now amounts to approximately $200 billion per year. So counterfeit producers have also stepped up their game. Women are now gathering in Reddit groups to “QC”(quality control) bags that they order from China via WeChat. Called “superfakes” by the media new york times, Such dupes are often perfect – right down to the correct number of stitches on each side of the classic Chanel quilted diamond (up to 11, apparently). They cost about a tenth of the normal price.
So the market for second-hand luxury bags is now large, widespread and complicated enough that those interested in buying a real handbag are at risk of being ripped off. As a result, it should be of interest to economists, who have long been gripped by questions about how markets function when there are ‘information asymmetries’ – when the seller of a good knows more about its quality than the buyer . The subject was the subject of “The Market for ‘Lemons’”, an article on the used car market published by George Akerlof in 1970, for which he won a Nobel Prize 31 years later.
In Mr. Akerlof’s model there are only four types of cars: new cars and used cars; good cars and bad cars. (In America, bad cars are known as “lemons.”) New cars are worth more than used cars, and good cars should be worth more than bad ones. Mr. Akerlof assumes that the owner of a car will learn over time whether it is a lemon. But this will not be obvious to a potential buyer. They will therefore offer the same price regardless of whether a car is good or bad, and the price takes into account the possibility that the car is a lemon. Unable to get a fair price, sellers of good cars will withdraw, causing prices to drop further. Gresham’s law will apply: just as bad money chases away good, lemons chase away solid cars. As such, the market for decent used cars could disappear completely.
It’s not hard to see the parallels with the luxury handbag market: bags are new or used; they are real or fake. The seller knows whether he bought his bag at a boutique on Fifth Avenue, ordered it via WeChat or even picked it up on Canal Street, but his potential buyer does not.
To help overcome these types of situations, it helps to have independent third parties who can assess quality. It is often easier to sell a used car to, for example, a mechanic or dealer, who can then provide a warranty to a less knowledgeable buyer. Many luxury brands provide authenticity cards with the bags when they are sold, so customers can prove their purchase is genuine. Checking these and other markers of quality is exactly the kind of role that the luxury resale platforms, which offer authenticity checking services, are expected to fulfill.
Yet the task is becoming increasingly difficult. This became clear in January when a lawsuit was filed by Chanel, a French fashion house, against What Goes Around Comes Around (WGACA), a vintage store in New York, was taken to court. Chanel has proven that wgaca, which markets itself as a ‘100% authenticity guarantee’ may have been selling counterfeits. In 2012, 30,000 authenticity cards, which are contained in every Chanel bag, were stolen from the warehouse of one of the company’s manufacturers. No bags are missing. Their serial numbers were subsequently declared invalid in Chanel’s database. Joseph Bravo, an executive at the company, said he was later asked by police in Florence, Italy, to identify one of these cards that had been placed in a fake pouch. Chanel has provided evidence that fifty bags with invalid serial numbers were ultimately sold wgaca. On February 6, the jury sided with Chanel and awarded the company $4 million in damages for copyright infringement and other violations. Chanel is also suing RealReal over counterfeiting issues, which the resale platform denies.
“Today’s verdict was not about not selling counterfeits,” argued Seth Weisser, the founder of wgaca, but “selling items that have been voided in Chanel’s database.” He stood behind the company’s 100% authenticity guarantee. But the decision casts doubt on what is being sold. If even the professionals can’t be trusted, what then? The theory of the lemons suggests that the used handbag market could collapse.
A sour taste
No one should be happy with such an outcome. The resale platforms are losing for obvious reasons. But brands also lose. A robust resale market provides one more reason to buy a luxury bag. While a white one Tshirt is a purely consumer good, which will probably be used until it is worn out and thrown away, a nice handbag is closer to buying a car: the product is an asset that depreciates in value over time, but still always retains value. (It can also cost about as much as a vehicle.)
The market collapse would also be a blow to shoppers. Lemon problems plague economists so much because they prevent willing buyers and sellers of fine cars and handbags from making deals that would benefit each party. Chanel has proven its point about how difficult it is for third parties to authenticate its products. It may now be wise for the company to use its ample resources to find a more robust way to do this. ■
Read more from Free Exchange, our column about economics:
What do you do with the 191 billion frozen euros that Russia possesses? (February 28)
Trump wants to hit Chinese companies. How badly could he hurt them? (February 22)
In defense of a financial instrument that does not do its job (February 15)
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