Jump to content

Veblen good

From Wikipedia, the free encyclopedia

This is an old revision of this page, as edited by Sirmont (talk | contribs) at 03:45, 2 April 2010 (→‎Austrian School's Perspective). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

Luxury cars are often stated to be desirable due to their price, which generates a certain amount of status. As a result it is argued that luxury cars are Veblen goods.
Paul Wall's jeweled dental grill. Some of Wall's grills cost nearly $30,000.[1]

In economics, Veblen goods are a group of commodities for which peoples' preference for buying them increases as a direct function of their price, as greater price confers greater status, instead of decreasing according to the law of demand. A Veblen good is often also a positional good.

Some types of high-status goods, such as high-end wines, designer handbags and luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products.[2] Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable. The Veblen effect is named after the economist Thorstein Veblen, who first pointed out the concepts of conspicuous consumption and status-seeking.[3] However, this 'anomaly' is mitigated when one understands that the demand curve does not necessarily have only one peak. The goods generally thought to be a Veblen good are still subject to the curve since demand does not increase with price infinitely. Demand may go up with price within a certain price range, but at the top of that range the demand will cease to increase before it begins to fall again with further price increases. At the other end of the spectrum, it is obvious that were luxury items priced equal to generics, the giant mass of the people would buy the luxury items, even though a few Veblen-seekers would not. Thus, it is illustrated that even a Veblen good is subject to the dictum that demand moves conversely to price although the response of demand to price is not consistent at all points on the demand curve.

Austrian School's Perspective

Austrian school of economics denies the existence of Veblen goods because they argue that actors economize means[4] and act rationally[5]: buying an item because its price is high is neither. Therefore, high price cannot in and of itself be an argument for choosing a mean to an end. However, two goods are of equal utility only if they are perfectly interchangeable from the point of view of the actor[6]. In addition, because utility is a subjective concept[7], a luxury good, with its implied high social status, is not equivalent to the exact same good priced less (and therefore of lower social status). More specifically, the multiple-peak curve (mentioned above) is explained by the fact that the demand curves of two different goods are mistakenly/simultaneously drawn on a single graph. The Veblen good, from the Austrian's perspective, is merely conspicuous consumption, a term also introduced by Thorstein Veblen.

Examples

A hypothetical luxury car, available for two different prices (with no other difference), a high price and a low price, would not qualify as a Veblen good as it would hardly sell at the high price. This demonstrates that it is not the price which is determinant, but the social status display effect. A "not at all" luxury car to which we would, somehow, attach a high social status would sell better than the highly priced version of the bi-priced luxury car.

A bottle of Louis Roederer Cristal (1993)

The Veblen effect is one of a family of theoretically possible anomalies in the general theory of demand in microeconomics. Other related effects include:

  • the snob effect: preference for goods because they are different from those commonly preferred; in other words, for consumers who want to use exclusive products, price is quality;[8]
  • the bandwagon effect: preference for a good increases as the number of people buying them increases;

These effects are discussed in a classic article by Leibenstein (1950).[9] The concept of the counter-Veblen effect is less well known, although it logically completes the family.[10]

None of these effects in itself predicts what will happen to actual quantity of goods demanded (the number of units purchased) as prices change—they refer only to preferences or propensities to purchase. The actual effect on quantity demanded will depend on the range of other goods available, their prices, and their substitutabilities for the goods concerned. The effects are anomalies within demand theory because the theory normally assumes that preferences are independent of price or the number of units being sold. They are therefore collectively referred to as interaction effects.

The interaction effects are a different kind of anomaly from that posed by Giffen goods. The Giffen goods theory is one for which observed demand rises as price rises, but the effect arises without any interaction between price and preference—it results from the interplay of the income effect and the substitution effect of a change in price.

Recent research has begun to examine the empirical evidence for the existence of goods which show these interaction effects.[11] The Yale Law Journal has published a broad overview.[12] Studies have also found evidence suggesting people receive more pleasure from more expensive goods.[13]

See also

References

  1. ^ Heldman, Breanne L. "More Bite for the Buck." New York Daily News (October 6, 2005).
  2. ^ Wood, John C. (1993). Thorstein Veblen: Critical Assessments, 352. London: Routledge. ISBN 0-415-07487-8.
  3. ^ Veblen, T. B. (1899). The Theory of the Leisure Class. An Economic Study of Institutions. London: Macmillan Publishers.
  4. ^ Rothbard, M.N.: Man, Economy, and State with Power and Market - Second edition, page 5. Ludvig von Mises Institute, 2009
  5. ^ von Mises, L.: Human Action - Fourth edition, page 19. Fox & Wilkes, 1966
  6. ^ Rothbard, M.N.: Man, Economy, and State with Power and Market - Second edition, page 23. Ludvig von Mises Institute, 2009
  7. ^ Rothbard, M.N.: Man, Economy, and State with Power and Market - Second edition, page 19. Ludvig von Mises Institute, 2009
  8. ^ Galatin, Malcolm and Robert D. Leiter (1981). Economics of Information, 25-29. Boston: Martinus Nijhoff Publishers. ISBN 0-898-38067-7.
  9. ^ Leibenstein, H. (1950). Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’ Demand. Quarterly Journal of Economics, 64, 183–207.
  10. ^ Lea, S. E. G., Tarpy, R. M., & Webley, P. (1987). The individual in the economy. Cambridge: Cambridge University Press. ISBN 0-521-26872-9.
  11. ^ e.g. Chao, A., & Schor, J. B. (1998). Empirical tests of status consumption: Evidence from women's cosmetics. Journal of Economic Psychology, 19, 107–131.
  12. ^ e.g. McAdams, Richard H. (1992). Relative Preferences. Yale Law Journal, vol. 102, no. 1 (October), pages 1-104.
  13. ^ Price tag can change the way people experience wine, study shows
Retrieved from "https://en.wikipedia.org/w/index.php?title=Veblen_good&oldid=353482792"