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    Veblen effect is an abnormal market behaviour where consumers purchase the higher-priced goods, even when, similar low-priced (but not identical) substitutes are available. It is caused either by the belief that higher price means higher quality, or by the desire for conspicuous consumption, which is to be seen as buying an expensive and prestigious item. The word ‘Veblen’ is named after its discoverer, the American economist, Thorstein Bunde Veblen (1857-1929).

    Veblen goods such as luxury cars are considered as desirable consumer products for conspicuous consumption because of their high prices. Veblen goods are generally luxury goods for which the demand for good increases, as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve. A higher price may make a product desirable as a status symbol in the practices of conspicuous consumption and conspicuous leisure. A product may be Veblen good because it is a positional good, something that few can own.

    Positional goods are goods, valued only by how they are distributed among the population, and not by how many of them there, are available in total, as would be the case with other consumer goods. The source of greater worth of positional goods is their desirability as a status symbol, which usually results in them, greatly exceeding, the value of comparable goods.

    Thorstein Veblen first identified conspicuous consumption as a mode of status-seeking in, ‘The Theory of the Leisure Class’ (1899). A corollary of the Veblen effect says that, lowering of price decreases the demand in quantity. Itis a treatise on economics, and a detailed, social critique of conspicuous consumption as a function of social class and of consumerism, derived from the social stratification of people and the division of labour, which are social institutions of the feudal period (9th–15th century) that have continued up to the modern era.

    The theory posits that social stratification represents the inherently unequal value of different works. Certain tasks in society are more valuable than others. Qualified people who fill those positions must be rewarded more than others.

    Champagne or a Rolls-Royce car are some perfect examples of Veblen goods.

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

– The snob effect: expresses 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.

– 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 fall prey to the fallacy that previous price increases suggest future price increases. 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. The hot hand fallacy is therefore the psychological condition that people believe an individual is “hot” or “cold” depending on past performance, when that performance has no bearing on future outcomes. For instance, rolling a die is independent of how you rolled it in the past.

The snob effect: expresses 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.

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 fall prey to the fallacy that previous price increases suggest future price increases. 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. The hot hand fallacy is therefore the psychological condition that people believe an individual is “hot” or “cold” depending on past performance, when that performance has no bearing on future outcomes. For instance, rolling a die is independent of how you rolled it in the past.

Sometimes, the value of a good increases as the number of buyers or users increases. This is called the bandwagon effect and it depends on the psychology of buying a product because it seems popular, or the network effect when a large number of 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 Facebook account also increased, because the user could reach more people. However, neither of these effects suggests that, at a given level of saturation, raising the price would boost demand.

Some of these effects are discussed in a 1950 article by economist Harvey Leibenstein. Counter-examples have been called the counter-Veblen effect.

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.

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

By Kamlesh Tripathi

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https://kamleshsujata.wordpress.com

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