Veblen Good

In economics, Veblen [veb-luhngoods are a group of commodities for which people’s 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. The Veblen effect is named after economist Thorstein Veblen, who first pointed out the concepts of conspicuous consumption and status-seeking.

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. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable. Often such goods are no better or even worse than their lower priced counterparts.

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 Veblen goods 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, were luxury items priced equal to non-luxury items of lower quality, all else being equal more people would buy the luxury items, even though a few Veblen-seekers would not. Thus, 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.

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 (a 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), and the bandwagon effect (a preference for a good increases as the number of people buying them increases). 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. Scottish economist Sir Robert Giffen observed that households that only had a minimum wage to survive, bought more bread when the bread price increased. This can be explained as follows: These households have to split their income between the cheap (and inferior) good ‘bread,’ and an expensive good. When the price of this inferior good increases by a certain amount, they can no longer afford to buy the more expensive good. For this reason, they spend more of their income on bread, in order to be able to survive.

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