Why is Rolex so expensive?

Relative to the cost of production, pretty much everything we own and use is "expensive." That 40 dollar cotton polo shirt costs a few dollars to make and transport. Louis Vuitton prices their products 13 to 15 times production cost (far above the 8-10x industry norm). This markup tends to be the greatest for luxury goods. But Rolex is expensive for many reasons beyond being a luxury product, a few of which I'll list.

1: Strong demand-Rolex is unarguably the automatic brand that the average consumer around the world will think of when it comes to luxury watches. This has made rolex a strong aspirational brand which many young professionals (yuppies) buy with their first cheque. The annual production is around 850,000 pieces a year with an average price somewhere around 7,000 USD.

2: Consistent design-With a few exceptions (like the leopard daytona) Rolex is very consistent in its designs. It has clearly delineated lines with easy to understand products. There are a few things that other watch brands vying for the crown could learn to stop doing. Excessive limited editions, special editions, explicit co-branding, heavy discounting, and strange advertising. There are only four brands that come to mind who conform to this standard: A. Lange & Söhne, Glashutte Original, Patek Philippe, and Rolex. Even the venerable Jaeger-LeCoultre has created the horrendous Navy Seal and Batman collaborations.

3: Consistent quality-This is much easier to achieve now with better technology, but through the ages Rolex hasn't turned to producing cheap quartz watches to stay afloat (it had Tudor to make the profit from the lower end market) which has preserved the brand's status.

4: Honest heritage/technical innovation-This is a bit mixed, but Rolex has a real history of being a reliable professional instrument before quartz watches. Rolex made the first waterproof (now legally called water resistant) watch, the first self-winding wristwatch (although self winding mechanisms are nothing new), the first helium release valve, and the first GMT movement. There are features we take for granted now and Rolex deserves honest recognition for these achievements. Another technical innovation they've put into mass production is the free sprung hairspring with breguet overcoil, along with the ceramic bezel: both features slowly being adopted by other brands. 

The real reason Rolex is expensive is that we allow it to be, but with all the watch you get for your money, it's not overpriced. Hublot on the other hand...