Veblen effect

The Veblen effect is a phenomenon highlighted by the economist and sociologist Thorstein Veblen. A Veblen good is a type of luxury good for which demand increases as the price increases, in apparent contradiction to the law of demand.

Introduction to Veblen effect

Many years ago Leibenstein (1950) emphasized the significance of the signal effect the way people consume. This signifies that the utility of a product increases or decreases depending on whether it is purchased and consumed by other consumers. It can also depend on wheter the good has an high or low cost. In marketing, people used to buy luxury goods to impress. It is known that most consumer tacitly accept that luxury goods are bought for social signaling ambitions. For example, artwork, designer clothes, vintage and luxury cars, jewelry, etc .

Veblen demand curve

Fig. 1 Veblen's curve

Let's explain why Veblen demand curve is really exceptional. Actually, it is not really hard to recognize the demand curve for Veblen goods as it is really unusual. The demand curve for Veblen goods has an upward slope that is the opposite of the typical demande curve which has a downward slope .

Veblen effect and Giffen paradox

In addition of Veblen effect, there is only one type of goods that follows the reverse demand curve. Conforming to the classical view, the more expensive a product is, the less demand there is for it. In reality, this does not represent the lowest tier product. According to Giffen's paradox, a Giffen good is a good whose quantity demanded by the consumer increases when its price increases, all other things remaining equal. It is due to the fact that consumers have to consume this good because there is no viable substitute to it and the good is necessary to meet the basic needs of the user. An example is the rising price of bread in England in the late 19th century. Despite rising prices, demand was also rising, especially among the poorest households .

Similarities and differences between Giffen and Veblen

Let's take a look at the similarities and differences between Giffen and Veblen ;

• Similarities: Both phenomena are exceptions to the basic law of demand. One and the other are a particular form of the phenomenon of negative income elasticity affecting goods. - > When the price increases, demand also increases.
• Differences: The Giffen effect is a phenomenon whereby the consumption of certain goods can increase while their price increases.

The Giffen effect concerns basic products. When their price rises, this causes a drop in the purchasing power of consumers, who therefore give up consuming more expensive stuffs in favour of basic stuffs despite the increase in price of the latter. Note that that Veblen goods are associated with luxury goods. With luxury goods and by definition the, Veblen goods, the importance is more in changes in other demand determinants, for example trends and social status.

Veblen effect, conspicuous consumption and avertising

The Veblen effect, conventionally associated with 'conspicuous consumption', is now associated with branded products that are functioning the same way as cheaper products but grants a better social status valued by end users. That is indeed quite the definition of the conspicuous consumption.

All of the that is created by marketing and more especially; advertising. The social image implanted in a brand appellation is often the most important objective in a company's advertising strategy. This objective has gained more and more importance in contemporary times as technological and social forces amplifies the value of brand identity and its power over end users .

The objective of all that is to create a Veblen effect. In other words, nowadays, advertising is used to bring desire in the user to belong to a certain group of people that associated with a certain product. This is conspicuous consumption .

Examples of Veblen effect

• Automobiles: Automobiles are a classic example of the Veblen effect. Luxury cars like Mercedes, BMW, and Lexus often have higher prices than their non-luxurious counterparts, and yet they remain popular due to their status and appeal.
• Clothing: Clothing is another example of the Veblen effect. High-end designer labels have a higher price tag than generic brands, but they remain popular because of their exclusive status and appeal.
• Watches: Watches are a great example of the Veblen effect. High-end luxury watches, such as Rolex and Omega, are often more expensive than their more affordable counterparts. However, they remain popular due to their status and exclusivity.
• Jewelry: Jewelry is another classic example of the Veblen effect. High-end jewelry pieces, such as diamond rings and gold necklaces, are often more expensive than their more affordable counterparts. However, they remain popular due to their status and appeal.
• Art: Art is a great example of the Veblen effect. High-end pieces of art, such as paintings and sculptures, are often more expensive than their more affordable counterparts. However, they remain popular due to their status and exclusivity.

Advantages of Veblen effect

The Veblen effect provides a range of advantages for both producers and consumers. These advantages include:

• Increased profits for producers: As the demand for a good increases as the price rises, producers can charge higher prices for their goods, leading to increased profits.
• Increased visibility and recognition: As the price of a good rises, it often attracts attention and is perceived as being of higher quality or more desirable. This can lead to increased visibility and recognition for a product or brand.
• Signaling of social status: For some consumers, higher-priced luxury goods signal social status or wealth. This can be beneficial for producers, as it increases the perceived value of the product.
• Increased exclusivity: Higher prices can help to create a sense of exclusivity, as only those with the money and inclination to purchase the product will do so. This can create a sense of desirability and prestige for the product.

Limitations of Veblen effect

The Veblen effect is an interesting phenomenon, but it has several limitations. These include:

• Limited Scope: The Veblen effect is limited to certain types of goods and services that are considered to be luxurious or status-oriented. It does not apply to all types of goods and services.
• Limited Timeframe: The Veblen effect depends on the amount of time that the price of the good or service is held at a particular level. If the price is changed frequently, it is not possible to observe the effect.
• Limited Impact: The Veblen effect only applies to a small percentage of the population and has a limited impact on overall consumption patterns.
• Limited Understanding: The Veblen effect is not well understood and there is a lack of research into its implications.

Other approaches related to Veblen effect

Other approaches related to the Veblen effect include:

• Status signaling: when individuals purchase luxury goods to demonstrate their wealth, status, and success to others.
• Snob effect: when individuals purchase a product because it is exclusive and not widely available.
• Experience effect: when individuals purchase a product because they expect it to enhance their experience and add to their lifestyle.
• Conspicuous consumption: when individuals purchase expensive goods to demonstrate their wealth and success to others.
• Quality effect: when individuals perceive a product to be of higher quality based on its price.

In summary, other approaches related to the Veblen effect include status signaling, snob effect, experience effect, conspicuous consumption, and quality effect. These approaches suggest that people may be willing to pay more for certain goods in order to demonstrate their wealth and status, enhance their experience, or simply to purchase something of higher quality.

Footnotes

Veblen effect — recommended articles

Prestige products — Substitute goods — Engel's law — Joint demand — Joint Supply — Demand — Consumer sovereignty — Threat of substitutes — Discriminatory pricing

References

• Kastanakis M. & Balabanis G. (2011), Advances in Consumer Research Volume 38, University of Chicago Press, Duluth.
• Kasztalska A. (2017), The econommic theory of luxury goods, Online // International Marketing and Management of Innovations: International Scientific EJournal. N°2, Management Department of University of Bielsko-Biala, Katowice.
• Lynne Pepall & Joseph Reiff (2016), Economics Letters Volume 145, University of Chicago Press, Duluth.
• Vallejo H. (2021), A Theorem of the Law of Demand , Universidad de los Andes, Bogota.
• Whitehead J. (2010), Microeconomics A Global Text, Routledge, London.

Author: MATHIEU Amaury