What are Veblen Goods?

Because of its exclusiveness and appeal as a status symbol, demand for a Veblen product grows as the price climbs. The demand curve for a Veblen good is upward-sloping, as opposed to the more common downward-sloping curve. 

 

A Veblen good is often a high-quality, desirable product, as opposed to a Giffen good, which is a lower-quality product with few alternatives.

 

Unlike a Giffen item, where greater demand is directly linked to the price rise, the increase in demand for a Veblen good reflects customer tastes and preferences. The concept is named after Thorstein Veblen, an American economist best remembered for coining the phrase "conspicuous spending."

 

Unlike Giffen products, which are elusive and difficult to identify, Veblen goods are rather widespread. Veblen goods are very expensive objects that are promoted as "exclusive" or communicate the image of affluence, such as designer jewelry, pricey watches, yachts, and luxury automobiles.

 

Veblen items are primarily targeted at the wealthy, have a strong brand identity that is synonymous with luxury, and are significantly more likely to be sold in premium boutiques than in traditional department shops. A Veblen good is essentially a luxury item that the mass of the population will not or cannot afford.

 

Because of their exclusivity, Veblen commodities defy the basic law of demand, which stipulates that quantity requested has an inverse relationship with price. Increases in the price of desirable and costly goods may actually boost its attractiveness to the status-conscious, because it is now farther out of reach for the common customer.

 

However, lowering the price of such a product may reduce its exclusive appeal, causing it to be spurned by status-conscious buyers while remaining too pricey for the broad market. As a result, reducing costs would reduce overall demand rather than increase it.

 

While there is no exact price point that distinguishes a Veblen item from a standard product, it is reasonable to conclude that a Veblen good is typically priced exponentially more than a standard product in the same category. 

 

Take, for example, the instance of timepieces. Watches of acceptable quality are generally available for about $100, but to qualify as a Veblen item, a watch would most likely cost four, five, or six figures.

 

Also Read | Elasticity of Demand and its Types

 

Behavioral Impact of a Veblen Good

 

According to studies, purchasing a Veblen item makes individuals happy and provides them with greater usefulness. This is because the good makes the person feel more exclusive and important because they are getting something of high quality that is out of reach for others. Many people agree that the extra cost is justified.

 

When a product is expensive, people often believe it is of higher quality, which is not always the case. Many firms source or manufacture their items in the same locations or factories, however some are marketed at a premium due to marketing and brand identification.

 

Higher prices are automatically associated with higher quality by consumers. If the price of the same item is raised, customers may consider it to be of greater quality and be ready to pay the higher price.

 

Similarly, a rich buyer is prepared to pay more for a product that is viewed as difficult to obtain. This is a very typical occurrence in the art world. Paintings by deceased artists, such as Picasso or Monet, sell for millions of dollars because there are so few of them. The price reflects the fact that the artist's works are not widely available in society, rather than the quality of the art.

 

When the price of an item rises, demand rises as well, and vice versa. Diamonds, for example, are a luxury item whose attraction is based on their high price. Veblen products are regarded as exceptions to the rule of demand, which holds that as a good's price rises, so does its demand, and vice versa. 

 

Some economists disagree, claiming that the rule only applies to absolutely similar commodities. When compared to pricey diamonds, for example, cheap diamonds may appear to be a lesser good in the perspective of the buyer; hence, they are not genuinely comparable.

 

Also Read | Guide to Demand and Supply Analysis

 

Reasons for the Veblen Effect

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What makes a Veblen Good?

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1. Perception of Quality

 

In his study of conspicuous consumerism, economist Thorstein Veblen observed that a greater price was frequently related with the sense of higher quality for some luxury items and services. As a result, a rise in price was interpreted as evidence of the producer's improved quality.

 

For example, when the price of a luxury handbag grows, so does demand for it. Consumers see the price rise as proof that the luxury handbag's manufacturer has increased the handbag's quality.

 

2. Positional Goods

 

Positional commodities are frequently Veblen products. The amount needed for a positional good is determined by the distribution of the good in society. 

 

Veblen goods frequently display a negative positional effect, which means that the amount requested of a Veblen good rises as the dispersion of the product decreases. It happens because a consumer's utility from owning such a thing stems solely from the fact that few other customers own it.

 

For example, a consumer's utility from possessing a diamond-encrusted handbag may be mostly derived from the fact that few other individuals in society can buy such an item. As a result, the diamond-encrusted purse serves as a positional good for this customer.

 

Also Read | What are Complementary Goods?

 

 

How do you identify a Veblen Good?

 

In contrast to giffen items, where people buy more as the price rises, the great demand for veblen goods reveals a lot about consumer interests and preferences. The word conspicuous consumerism was coined by Thorstein Veblen, an American economist, and the term veblen products was named after him. 

 

Veblen items are widely available. Giffen products, on the other hand, are commodities that are difficult to identify. Designer clothes, branded watches, luxury automobiles, and other items that are overly expensive and symbolize higher self-esteem or have a distinct personality are termed veblen products. 

 

Wealthy individuals are the intended market for veblen items. Such items have their own distinct identity and reflect status and luxury. Such items are only available in high-end showrooms, not in ordinary department shops. 

 

Thorstein Veblen invented the term "Conspicuous Consumption" in the 19th century to describe the habit of society's wealthier individuals to spend on commodities and items that tended to boost their reputation, social influence, and position.

 

It refers to the attitude of acquiring a product only on the basis of its perceived value rather than the intrinsic, practical utility, services, and features it provides. 

 

This was discovered to be shown by persons who are not well-off, as it helps them disguise their true riches and make others regard them as affluent, therefore assisting them in mentally combating the perception of poverty.

 

Veblen products defy the general rule of demand, which states that a rise in the price of an item will lower demand or have a negative influence on demand. A rise in the price of a veblen good will encourage brand-conscious consumers to buy more of it. 

 

A fall in the price of veblen items, on the other hand, will reduce demand, and brand-conscious consumers will no longer be interested in purchasing that product. Despite this price reduction, veblen items will remain pricey for other buyers. 

 

As a result, as the prices of veblen commodities fall, the overall demand for them falls. There are no specific price norms that distinguish veblen commodities from ordinary goods. A veblen good, on the other hand, is likely to be several times more expensive than a typical item. 

 

Also Read | Overview of Purchasing Power Parity

 

Types of Veblen Goods

 

1. Invidious Comparison

 

A person's wish to avoid being viewed as a member of the lower class is known as invidious comparison. This is a sort of conspicuous spending in which a person actively purchases products that are not used by the lower income group. As a result, they are willing to pay exorbitant prices to separate themselves from the lower-income segment.

 

2. Pecuniary Emulation

 

Pecuniary emulation refers to a person's desire to be seen as a member of the higher class. When compared to the unjust comparison, it is more common. It occurs when a person from a lower-income group tries to depict himself as belonging to a higher-income group by changing his consumption habits.

 

In order to distinguish and clarify, invidious consumption is practiced by the top class, whilst pecuniary emulation is practiced by the poor and middle classes.

 

Veblen Goods Vs Giffen Goods

 

Veblen goods and Giffen goods are both examples of things whose demand rises as the price rises. The price has a direct relationship with their demand. 

 

1. A Veblen good, like a Giffen good, has an upward-sloping demand curve, as opposed to the more common downward-sloping curve. Because of their snob appeal, these commodities defy the basic rule of demand, which stipulates that quantity desired has an inverse connection with price.

 

2. There is, however, a distinction between the two. In contrast to a Veblen good, which is a high-quality, desirable commodity, a Giffen good is a low-quality product with no readily available replacements.

 

3. In addition, unlike a Giffen item, where greater demand is directly attributed to the price increase, the increase in demand for a Veblen commodity reflects customer tastes, preferences, and snob appeal. 

 

4. Giffen goods are another type of item that deviates from the rule of demand. Unlike Veblen products, which defy the law of demand after prices reach a certain point, Giffen goods defy the law of demand until a specific point is reached. In addition, Giffen goods have a detrimental impact on revenue. The price of a Giffen good and the amount required of the good have a positive relationship.
    

 

Also Read | Law of Diminishing Marginal Utility

 

A Veblen good is one for which demand and price grow in lockstep. Veblen products are often high-end, well-made, and unique objects that serve as a status symbol. Affluent consumers who value the utility of a product are more inclined to seek for Veblen products.