Veblen good

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Veblen goods such as luxury cars are considered desirable consumer products for conspicuous consumption because of, rather than in spite of, their high prices. SC06 2006 Rolls-Royce Phantom.jpg
Veblen goods such as luxury cars are considered desirable consumer products for conspicuous consumption because of, rather than in spite of, their high prices.

A Veblen good is a type of luxury good for which the demand for a good increases as the price increases, in apparent (but not actual) 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.

Contents

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, a 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 to only luxury goods or all goods. [6] [7]

Analysis

Veblen goods have an upward-sloping demand curve. Demand curve of Veblen goods.png
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 existence of Veblen goods can be explained by the following concepts:

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]  

Non-violation of the law of demand

Despite what appears to be a violation of the Law of Demand, the upward-sloping demand curve for a Veblen good does not actually violate the Law. This is because the social value of the good is itself dependent on the price; in other words, the good itself changes as the price changes. [16] This is illustrated when looking at the derivative of societal demand for a social good (goods whose value depends on others' consumption of it) with respect to price:

or

In other words, the rise in price increases the societal demand for the good, and because an individual demands less of this good the more others have, the entire left-hand side is positive, meaning the right-hand side is positive. The RHS means that in general, people will demand more of the social good the higher price goes (though not necessarily every individual will do so). Because of the price itself leading to a change in the social good's value, as opposed to a pure price effect leading to an increase in demand, this does not constitute a law of demand violation.

Ethical concerns

Being aware of the existence of Veblen goods, concerns were raised regarding their wastefulness [17] [18] as they are viewed as deadweight loss. [19] Consuming Veblen goods also results in other financial and social consequences such as unequal wealth distribution [1] and the need to adjust tax formulas. [20] [21] Another negative outcome is that this type of consumption can be a culprit of the future exacerbation of pollution. [22]

Nonetheless, one exception is ethical consumers interested in virtue signaling through their consumption of goods and services. [23] Veblen goods targeting this market segment must also be ethically manufactured to increase in their quantity demanded. [23]

Expensive Champagne is an example of a consumable Veblen good. ROEDERER BOUTEILLE+COFFRET CRISTAL BRUT 2007 750ML V2 RVB.jpg
Expensive Champagne is an example of a consumable Veblen good.

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

Sometimes, the value of a good increases as the number of buyers or 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 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 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. [27] Counter-examples have been called the counter-Veblen effect. [28]

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. [29] [30]

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, 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.

See also

Related Research Articles

Microeconomics Behavior of individuals and firms

Microeconomics is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.

Supply and demand Economic model of price determination in microeconomics

In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded will equal the quantity supplied, resulting in an economic equilibrium for price and quantity transacted. It forms the theoretical basis of modern economics.

Indifference curve Concept in economics

In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is indifferent. That is, any combinations of two products indicated by the curve will provide the consumer with equal levels of utility, and the consumer has no preference for one combination or bundle of goods over a different combination on the same curve. One can also refer to each point on the indifference curve as rendering the same level of utility (satisfaction) for the consumer. In other words, an indifference curve is the locus of various points showing different combinations of two goods providing equal utility to the consumer. Utility is then a device to represent preferences rather than something from which preferences come. The main use of indifference curves is in the representation of potentially observable demand patterns for individual consumers over commodity bundles.

In economics, elasticity measures the percentage change of one economic variable in response to a change in another. If a good's price elasticity of demand is -2, a 10% increase in price causes the quantity demanded to fall 20%.

Conspicuous consumption Concept in sociology and economy

Conspicuous consumption is a term used to describe and explain the consumer practice of purchasing or using goods of a higher quality, price or in greater quantity than might be considered necessary in practical terms. More specifically, it refers to the spending of money on or the acquiring of luxury goods and services in order to publicly display the economic power of one's income or accumulated wealth. To the conspicuous consumer, such a public display of discretionary economic power is a means of either attaining or maintaining a given social status.

A good's price elasticity of demand is a measure of how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others. The price elasticity gives the percentage change in quantity demanded when there is a one percent increase in price, holding everything else constant. If the elasticity is -2, that means a one percent price rise leads to a two percent decline in quantity demanded. Other elasticities measure how the quantity demanded changes with other variables.

In economics, the cross elasticity of demand or cross-price elasticity of demand measures the percentage change of the quantity demanded for a good to the percentage change in the price of another good, ceteris paribus. In real life, the quantity demanded of good is dependent on not only its own price but also the price of other "related" products.

Giffen good Product that people consume more of as the price rises

In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics. For any other sort of good, as the price of the good rises, the substitution effect makes consumers purchase less of it, and more of substitute goods; for most goods, the income effect reinforces this decline in demand for the good. But a Giffen good is so strongly an inferior good in the minds of consumers that this contrary income effect more than offsets the substitution effect, and the net effect of the good's price rise is to increase demand for it. Also known as Giffen paradox. A Giffen good is considered to be the opposite of an ordinary good.

Inferior good Concept in economics

In economics, an inferior good is a good whose demand decreases when consumer income rises, unlike normal goods, for which the opposite is observed. Normal goods are those goods for which the demand rises as consumer income rises.

Normal good Good that increases in demand when incomes rise

In economics, a normal good is a type of a good which experiences an increase in demand due to an increase in income. When there is an increase in a person's income, for example due to a wage rise, a good for which the demand rises due to the wage increase, is referred as a normal good. Conversely, the demand for normal goods declines when the income decreases, for example due to a wage decrease or layoffs.

In microeconomics, two goods are substitutes if the products could be used for the same purpose by the consumers. That is, a consumer perceives both goods as similar or comparable, so that having more of one good causes the consumer to desire less of the other good. Contrary to complementary goods and independent goods, substitute goods may replace each other in use due to changing economic conditions. An example of substitute goods is Coca-Cola and Pepsi; the interchangeable aspect of these goods is due to the similarity of the purpose they serve, i.e fulfilling customers' desire for a soft drink. These types of substitutes can be referred to as close substitutes.

In microeconomics, an Engel curve describes how household expenditure on a particular good or service varies with household income. There are two varieties of Engel curves. Budget share Engel curves describe how the proportion of household income spent on a good varies with income. Alternatively, Engel curves can also describe how real expenditure varies with household income. They are named after the German statistician Ernst Engel (1821–1896), who was the first to investigate this relationship between goods expenditure and income systematically in 1857. The best-known single result from the article is Engel's law which states that as income grows, spending on food becomes a smaller share of income; therefore, the share of a household's or country's income spent on food is an indication of their affluence.

<i>The Theory of the Leisure Class</i> book by Thorstein Veblen

The Theory of the Leisure Class: An Economic Study of Institutions (1899) is a book by Thorstein Veblen about how the possession or pursuit of wealth affects human behavior. More specifically, it is a treatise on economics as well as 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 labor, which are social institutions of the feudal period that have continued to the modern era.

Consumption (economics) Using money to obtain an item for use

Consumption, defined as spending for acquisition of utility, is a major concept in economics and is also studied in many other social sciences. It is seen in contrast to investing, which is spending for acquisition of future income.

Law of demand Fundamental principle in microeconomics

In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), quantity demanded will decrease (↓); conversely, as the price of a good decreases (↓), quantity demanded will increase (↑)". Alfred Marshall worded this as: "When then we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price". The law of demand, however, only makes a qualitative statement in the sense that it describes the direction of change in the amount of quantity demanded but not the magnitude of change.

The Slutsky equation in economics, named after Eugen Slutsky, relates changes in Marshallian (uncompensated) demand to changes in Hicksian (compensated) demand, which is known as such since it compensates to maintain a fixed level of utility.

Demonstration effects are effects on the behavior of individuals caused by observation of the actions of others and their consequences. The term is particularly used in political science and sociology to describe the fact that developments in one place will often act as a catalyst in another place.

In conservation and energy economics, the rebound effect is the reduction in expected gains from new technologies that increase the efficiency of resource use, because of behavioral or other systemic responses. These responses diminish the beneficial effects of the new technology or other measures taken.

In economics, the income elasticity of demand is the responsivenesses of the consumers to the income change

Conspicuous conservation is a term which describes consumer behavior, in which consumers purchase environmentally friendly products in order to signal a higher social status.

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