The ever increasing price means there are many collectors that are able to afford the price.
Based on an interview with John Mayer I watched a few weeks ago where he shares his astounding collection of watches (previous, I only know him as a singer, little did I know he is a watch geek
), a collector is aware of the price, but it doesn't concern them. As long as they can afford the price and its something that they want in their collection, they'll whack it. Watch collectors typically enjoy the price appreciation over the long-term because of the way watches are valued (as elaborated by sifus above), but true collectors will never be bothered with how much they "earn" because they derive pleasure from collecting
, not trading. The fear of losing the watch forever from their collection far outweighs the pleasure of earning money from it.
Once its in their collection its pretty hard for them to let go regardless of the price. That, in turn, reduces supply in the market.
Looking into the longer-term, I highly doubt that the business model of the luxury watch industry would change because there is always individuals that would appreciate the craftsmanship. Mass-producing would essentially change the landscape of the watch industry and how people perceive the value of the watches, which will be jeopardising their own future profits (something like killing the goose for the golden egg).