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
Share it if you like it
Shravan Charity Mission is an NGO that works for poor children suffering from life threatening diseases especially cancer. Our posts are meant for our readers that includes both children and adults and it has a huge variety in terms of content. We also accept donations for our mission. Should you wish to donate for the cause. The bank details are given below:
NAME OF ACCOUNT: SHRAVAN CHARITY MISSION
Account no: 680510110004635 (BANK OF INDIA)
IFSC code: BKID0006805
GLOOM BEHIND THE SMILE
(The book is about a young cancer patient. Now archived in 8 prestigious libraries of the US that includes Harvard College Library; Harvard University Library; Library of Congress; University of Washington, Seattle; University of Minnesota, Minneapolis; Yale University, New Haven; University of Chicago; University of North Carolina, at Chapel Hill University Libraries. It can also be accessed in MIT through Worldcat.org. Besides, it is also available for reading in libraries and archives of Canada, Cancer Aid and Research Foundation Mumbai and Jaipuria Institute of Management, Noida, India)
ONE TO TANGO … RIA’S ODYSSEY
(Is a book on ‘singlehood’ about a Delhi girl now archived in Connemara Library, Chennai and Delhi Public Library, GOI, Ministry of Culture, Delhi; Available for reading in Indian National Bibliography, March 2016, in the literature section, in Central Reference Library, Ministry of Culture, India, Belvedere, Kolkata-700022)
AADAB LUCKNOW … FOND MEMORIES
(Is a fiction written around the great city of Nawabs—Lucknow. It describes Lucknow in great detail and also talks about its Hindu-Muslim amity. That happens to be the undying characteristics of Lucknow. The book was launched in Lucknow International Literary Festival of 2014. It is included for reading in Askews and Holts Library Services, Lancashire, U.K.)
REFRACTIONS … FROM THE PRISM OF GOD
(Co-published by Cankids–Kidscan, a pan India NGO and Shravan Charity Mission, that works for Child cancer in India. The book is endorsed by Ms Preetha Reddy, MD Apollo Hospitals Group. It was launched in Lucknow International Literary Festival 2016)
TYPICAL TALE OF AN INDIAN SALESMAN
(Is a story of an Indian salesman who is, humbly qualified. Yet he fights his ways through unceasing uncertainties to reach the top. A good read not only for salesmen. The book was launched on 10th February, 2018 in Gorakhpur Lit-Fest. Now available in Amazon, Flipkart and Onlinegatha)
RHYTHM … in poems
(Published in January 2019. The book contains 50 poems. The poems describe our day to day life. The book is available in Amazon, Flipkart and Onlinegatha)
(Published in February 2020. The book is a collection of eight short stories. It is available in Amazon, Flipkart and Notion Press)
Short stories and Articles published in Bhavan’s Journal: Reality and Perception, 15.10.19; Sending the Wrong Message, 31.5.20; Eagle versus Scholars June, 15 & 20 2020; Indica, 15.8.20; The Story of King Chitraketu, August 31 2020; Breaking Through the Chakravyuh, September 30 2020. The Questioning Spouse, October 31, 2020; Happy Days, November 15, 2020; The Karma Cycle of Paddy and Wheat, December 15,2020;
(ALL THE ABOVE TITLES ARE AVAILABLE FOR SALE IN AMAZON, FLIPKART AND OTHER ONLINE STORES OR YOU COULD EVEN WRITE TO US FOR A COPY)