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Veblen good

Topic: Finance

 From HandWiki - Reading time: 7 min
Short description: Luxury good for which the demand increases as the price increases
Veblen goods such as luxury cars are considered desirable consumer products for conspicuous consumption because of, rather than despite, their high prices.

A Veblen good is a type of luxury good, named after American economist Thorstein Veblen, for which the demand increases as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve. The higher prices of Veblen goods may make them desirable as a status symbol in the practices of conspicuous consumption and conspicuous leisure. A product may be a Veblen good because it is a positional good, something few others can own.

Background

Veblen goods are named after American economist Thorstein Veblen, who first identified conspicuous consumption as a mode of status-seeking (i.e., keeping up with the Joneses[1]) in The Theory of the Leisure Class (1899).[2] The testability of this theory was questioned by Colin Campbell due to the lack of complete honesty from research participants.[3] However, research in 2007 studying the effect of social comparison on human brains can be used as an evidence supporting Veblen.[4] The idea that seeking status can be an incentive to spend was also later discussed by Fred Hirsch.[5]

Additionally, there have been different arguments on whether Veblen’s theory applies only to luxury goods or all goods.[6][7]

Analysis

Veblen goods have an upward-sloping demand curve.

A corollary of the Veblen effect is that lowering the price may increase the demand at first,[8] but will decrease the quantity demanded afterwards.[9]

The following concepts can explain the existence of Veblen goods:

  • Pecuniary emulation (or pecuniary success), which leads to invidious comparison (or invidious distinction).[8][10]
  • Relative consumption trap.[11]
  • The inverse relationship between one’s well-being with another’s income.[11]
  • The suppression of explicit attempts to emphasize social status differences.[12]

The theory of Veblen good made a significant contribution towards marketing and advertising.[12] There are multiple studies considering Veblen goods as a tool to develop and maintain a strong relationship with consumers.[13]

While Veblen goods are more affordable for high income households[8] and affluent societies are usually known as the targeted income groups of Veblen brands,[11][12] they have been experiencing a trend away from conspicuous consumption.[14][15]  

Ethical concerns

Being aware of the existence of Veblen goods, concerns were raised regarding their wastefulness [16][17] as they are viewed as deadweight loss.[18] Consuming Veblen goods also results in other financial and social consequences such as conspicuous demonstration of unequal wealth distribution [1] and possible changes to optimal tax formulas.[19][20] Another negative outcome is that this type of consumption can be a culprit of the future exacerbation of pollution.[21]

Nonetheless, one exception is ethical consumers interested in virtue signaling through their consumption of goods and services.[22] Veblen goods targeting this market segment must also be ethically manufactured to increase in their quantity demanded.[22]

Related concepts

Expensive Champagne is an example of a consumable Veblen good.[23]

The Veblen effect is one of a family of theoretical anomalies in the general law of demand in microeconomics. Related effects include:

The stainless steel Rolex Daytona frequently sells for over its list price
  • The snob effect: expressed preference for goods because they are different from those commonly preferred; in other words, the demand for a certain good by individuals of a higher income level is inversely related to its demand by those of a lower income level.[24]
  • The common law of business balance: the low price of a good is believed by many to indicate that the producer may have compromised quality, that is, "you get what you pay for".
  • The hot-hand fallacy: stock buyers have fallen prey to the fallacy that previous price increases suggest future price increases.[25] Other rationales for buying a high-priced stock are that previous buyers who bid up the price are proof of the issue's quality, or conversely, that an issue's low price may be evidence of viability problems.

Bandwagon effect

Sometimes, the value of a good increases as the number of buyers (or particular group of buyers and users) increases. This is called the bandwagon effect when it depends on the psychology of buying a product because it seems popular, or the network effect when numerous buyers or users itself increases the value of a good. For example, as the number of people with telephones or Facebook accounts increased, the value of having a telephone or a Facebook account increased, because users of those could reach more people. However, neither of these effects suggests that raising the price would boost demand at a given level of saturation.

Relationship with laws of demand and supply

Veblen effects are discussed in a 1950 article by economist Harvey Leibenstein.[26] Counter-examples have been called the counter-Veblen effect.[27] The counter-Veblen effect occurs when preference for goods increases with the decrease in their price, thereby outperforming the supply and demand effect, as a result of conspicuous thrift amongst some consumers.

The effect on demand depends on the range of other goods available, their prices, and whether they serve as substitutes for the goods in question. 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.[28][29]

Interaction effects are a different kind of anomaly from that posed by Giffen goods. The Giffen goods theory is one for which observed quantity demanded rises as price rises. Still, 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 price change.

See also

References

  1. ↑ 1.0 1.1 Banuri, Sheheryar; Nguyen, Ha (2020). "Borrowing to Keep Up (With the Joneses): Inequality, Debt, and Conspicuous Consumption" (in en). SSRN Electronic Journal. doi:10.2139/ssrn.3721084. ISSN 1556-5068. https://www.ssrn.com/abstract=3721084. 
  2. ↑ Veblen, T. B. (1899). The Theory of the Leisure Class. An Economic Study of Institutions. London: Macmillan Publishers.
  3. ↑ Campbell, Colin (2018) (in en-gb). The Romantic Ethic and the Spirit of Modern Consumerism | SpringerLink. doi:10.1007/978-3-319-79066-4. ISBN 978-3-319-79065-7. https://link.springer.com/content/pdf/10.1007/978-3-319-79066-4.pdf. 
  4. ↑ Fliessbach, K.; Weber, B.; Trautner, P.; Dohmen, T.; Sunde, U.; Elger, C. E.; Falk, A. (2007-11-23). "Social Comparison Affects Reward-Related Brain Activity in the Human Ventral Striatum" (in en). Science 318 (5854): 1305–1308. doi:10.1126/science.1145876. ISSN 0036-8075. PMID 18033886. Bibcode: 2007Sci...318.1305F. https://www.science.org/doi/10.1126/science.1145876. 
  5. ↑ Hirsch, Fred (2013-10-01) (in en). Social Limits to Growth. Harvard University Press. doi:10.4159/harvard.9780674497900. ISBN 978-0-674-49790-0. https://www.degruyter.com/document/doi/10.4159/harvard.9780674497900/html. 
  6. ↑ Phillips, Ronnie J.; Slottje, Daniel J. (1983-03-01). "The Importance of Relative Prices in Analyzing Veblen Effects". Journal of Economic Issues 17 (1): 197–206. doi:10.1080/00213624.1983.11504096. ISSN 0021-3624. https://doi.org/10.1080/00213624.1983.11504096. 
  7. ↑ Goldstein, Robin (2019-06-03). Economic Experiments in Honor of Thorstein Veblen (These de doctorat thesis). Bordeaux.
  8. ↑ 8.0 8.1 8.2 Bagwell, Laurie Simon; Bernheim, B. Douglas (1996). "Veblen Effects in a Theory of Conspicuous Consumption". The American Economic Review 86 (3): 349–373. ISSN 0002-8282. https://www.jstor.org/stable/2118201. 
  9. ↑ John C. Wood (1993). Thorstein Veblen: Critical Assessments. Psychology Press. ISBN 978-0-415-07487-2. 
  10. ↑ Rae, John (1905). The sociological theory of capital : being a complete reprint of the new principles of political economy, 1834. Macmillan. ISBN 0-659-91292-9. OCLC 1083987505. http://worldcat.org/oclc/1083987505. 
  11. ↑ 11.0 11.1 11.2 Eaton, B. Curtis (2012), "Veblen Goods", The New Palgrave Dictionary of Economics, 2012 Version (Basingstoke: Palgrave Macmillan), doi:10.1057/9781137336583.1928, ISBN 978-1-137-33658-3, http://dx.doi.org/10.1057/9781137336583.1928, retrieved 2021-04-23 
  12. ↑ 12.0 12.1 12.2 Sheff, Jeremy N (2011). "Veblen Brands". Minnesota Law Review 96: 769. 
  13. ↑ Piong, Chee. Starbucks coffee as a Veblen good : perceived status enhancement, brand involvement, and brand loyalty. OCLC 900552999. http://worldcat.org/oclc/900552999. 
  14. ↑ Currid-Halkett, Elizabeth (2017-05-15). The Sum of Small Things: Culture and Consumption in the 21st Century. Princeton University Press. doi:10.1515/9781400884698. ISBN 978-1-4008-8469-8. http://dx.doi.org/10.1515/9781400884698. 
  15. ↑ Canterbery, E. R. (1998). "The Theory of the Leisure Class and the Theory of Demand". The Founding of Institutional Economics. Routledge. 2002-01-08. pp. 151–168. doi:10.4324/9780203021927-14. ISBN 978-0-203-02192-7. http://dx.doi.org/10.4324/9780203021927-14. Retrieved 2021-04-23. 
  16. ↑ Hopkins, Ed; Kornienko, Tatiana (2004). "Running to Keep in the Same Place: Consumer Choice as a Game of Status" (in en). American Economic Review 94 (4): 1085–1107. doi:10.1257/0002828042002705. ISSN 0002-8282. https://www.aeaweb.org/articles?id=10.1257/0002828042002705. 
  17. ↑ Frank, Robert H. (1985). "The Demand for Unobservable and Other Nonpositional Goods". The American Economic Review 75 (1): 101–116. ISSN 0002-8282. https://www.jstor.org/stable/1812706. 
  18. ↑ Eaton, B. Curtis; Matheson, Jesse A. (2013-07-01). "Resource allocation, affluence and deadweight loss when relative consumption matters" (in en). Journal of Economic Behavior & Organization 91: 159–178. doi:10.1016/j.jebo.2013.04.011. ISSN 0167-2681. https://www.sciencedirect.com/science/article/abs/pii/S0167268113001066. 
  19. ↑ Aronsson, Thomas; Johansson-Stenman, Olof (2008-06-01). "When the Joneses' consumption hurts: Optimal public good provision and nonlinear income taxation" (in en). Journal of Public Economics 92 (5–6): 986–997. doi:10.1016/j.jpubeco.2007.12.007. ISSN 0047-2727. https://www.sciencedirect.com/science/article/abs/pii/S0047272707002083. 
  20. ↑ Tanninen, Hannu; Tuomala, Matti (2008) (in en). Work Hours, Inequality and Redistribution: Veblen Effects Reconsidered. Tampereen yliopisto. ISBN 978-951-44-7584-9. https://trepo.tuni.fi/handle/10024/65717. 
  21. ↑ Jorgenson, Andrew; Schor, Juliet; Huang, Xiaorui (2017-04-01). "Income Inequality and Carbon Emissions in the United States: A State-level Analysis, 1997–2012" (in en). Ecological Economics 134: 40–48. doi:10.1016/j.ecolecon.2016.12.016. ISSN 0921-8009. https://www.sciencedirect.com/science/article/abs/pii/S0921800916308345. 
  22. ↑ 22.0 22.1 Stiefenhofer, Pascal; Zhang, Wei (2020-11-30). "Conspicuous ethics: a Veblen effect condition for ethical consumption goods". Applied Economics Letters 29: 72–74. doi:10.1080/13504851.2020.1855306. ISSN 1350-4851. https://doi.org/10.1080/13504851.2020.1855306. 
  23. ↑ "Price tag can change the way people experience wine, study shows". 2008-01-15. http://news-service.stanford.edu/pr/2008/pr-wine-011608.html. 
  24. ↑ Galatin, M.; Leiter, Robert D. (1981). Economics of Information. Boston: Martinus Nijhoff. pp. 25–29. ISBN 978-0-89838-067-5. https://archive.org/details/economicsofinfor0000unse_e0f1/page/25. 
  25. ↑ 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. 
  26. ↑ Leibenstein, Harvey (1950). "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand". Quarterly Journal of Economics 64 (2): 183–207. doi:10.2307/1882692. 
  27. ↑ Lea, S. E. G.; Tarpy, R. M.; Webley, P. (1987). The individual in the economy. Cambridge: Cambridge University Press. ISBN 978-0-521-26872-1. https://archive.org/details/individualinecon00leas. 
  28. ↑ 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. 
  29. ↑ McAdams, Richard H. (1992). "Relative Preferences". Yale Law Journal 102 (1): 1–104. doi:10.2307/796772. 



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