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Veblen good

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Veblen goods, such as a Rolls-Royce Phantom luxury automobile, are considered desirable consumer products for conspicuous consumption because of, rather than in spite of, their high prices

Veblen goods are types of luxury goods for which demand is proportional to high price, an apparent contradiction of the science of economics' law of demand. Also functioning as positional goods, they include expensive wines, jewelry, fashion-designer handbags, and luxury cars which are in demand because of, rather than in spite of, the high prices asked for them. This makes them desirable as status symbols in the practices of conspicuous consumption and conspicuous leisure.

Veblen goods are named after American economist Thorstein Veblen, who first identified conspicuous consumption as a mode of status-seeking in The Theory of the Leisure Class (1899).[1] A corollary of the Veblen effect (where goods are desired for being over-priced) is that a decrease of their price decreases their demand.[2]

Rationale

High prices irrespective of cost can raise the status of an item through exclusivity.

By definition expensive, a Veblen good is still subject to the law of demand, but the response of demand to price is not consistent at all points along the demand curve.

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

  • The snob effect: expressed 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.[3]
  • The bandwagon effect: preference for a good increases as the number of people buying them increases (a psychological effect).
  • The network effect: value of a good increases as the number of buyers or users increases (e.g., as the number of people with telephones or Facebook increased, the value of having a telephone or being on Facebook increased since the user could reach more people).
  • The common law of business balance: low price of a good indicates that the producer may have compromised quality, that is, "you get what you pay for".
  • The Hot-hand fallacy: stock buyers have been observed to have the hot-hand fallacy, preferring to buy more successful stocks and sell those that are less successful.[4]

Some of these effects are discussed in a classic article by Leibenstein (1950).[5] The concept of the counter-Veblen effect is less well known, although it logically completes the family.[6]

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.[7] The Yale Law Journal has published a broad overview.[8] Studies have also found evidence suggesting people receive more pleasure from more expensive goods.[9]

See also

References

  1. ^ Veblen, T. B. (1899). The Theory of the Leisure Class. An Economic Study of Institutions. London: Macmillan Publishers.
  2. ^ John C. Wood (1993). Thorstein Veblen: Critical Assessments. Psychology Press. ISBN 978-0-415-07487-2.
  3. ^ Galatin, M.; Leiter, Robert D. (1981). Economics of Information. Boston: Martinus Nijhoff. pp. 25–29. ISBN 0-89838-067-7.
  4. ^ Johnson, Joseph; Tellis, G.J.; Macinnis, D.J. (2005). "Losers, Winners, and Biased Trades". Journal of Consumer Research. 2 (32): 324–329. doi:10.1086/432241.
  5. ^ Leibenstein, H. (1950). "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand". Quarterly Journal of Economics. 64 (2): 183–207. doi:10.2307/1882692.
  6. ^ Lea, S. E. G.; Tarpy, R. M.; Webley, P. (1987). The individual in the economy. Cambridge: Cambridge University Press. ISBN 0-521-26872-9.
  7. ^ e.g. Chao, A.; Schor, J. B. (1998). "Empirical tests of status consumption: Evidence from women's cosmetics". Journal of Economic Psychology. 19 (1): 107–131. doi:10.1016/S0167-4870(97)00038-X.
  8. ^ e.g. McAdams, Richard H. (1992). "Relative Preferences". Yale Law Journal. 102 (1): 1–104. JSTOR 796772.
  9. ^ Price tag can change the way people experience wine, study shows
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