Veblen good

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Veblen goods such as luxury cars are considered desirable consumer products for conspicuous consumption because of, rather than despite, 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 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, a subject that could or couldn't be taught on Advanced Marketing Classes.

Contents

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. 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 following concepts can explain the existence of Veblen goods:

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]

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:

The stainless steel Rolex Daytona frequently sells for over its list price RolexDaytona.jpg
The stainless steel Rolex Daytona frequently sells for over its list price

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

Related Research Articles

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<span class="mw-page-title-main">Supply and demand</span> Economic model of price determination in a market

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<span class="mw-page-title-main">Thorstein Veblen</span> American economist and sociologist (1857–1929)

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<span class="mw-page-title-main">Conspicuous consumption</span> Concept in sociology and economy

In sociology and in economics, the term conspicuous consumption describes and explains the consumer practice of buying and using goods of a higher quality, price, or in greater quantity than practical. In 1899, the sociologist Thorstein Veblen coined the term conspicuous consumption to explain the spending of money on and the acquiring of luxury commodities specifically as a public display of economic power—the income and the accumulated wealth—of the buyer. To the conspicuous consumer, the public display of discretionary income is an economic 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.

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<span class="mw-page-title-main">Giffen good</span> Product that people consume more of as the price rises

In microeconomics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa, violating the law of demand.

<span class="mw-page-title-main">Inferior good</span> Concept in economics

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<span class="mw-page-title-main">Normal good</span> 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, unlike inferior goods, for which the opposite is observed. 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.

<span class="mw-page-title-main">Engel curve</span> Curve describing how household income varies with household expenditure

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<span class="mw-page-title-main">Income–consumption curve</span> Function in economics

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

The Theory of the Leisure Class: An Economic Study of Institutions (1899), by Thorstein Veblen, is a treatise of economics and sociology, and a critique of conspicuous consumption as a function of social class and of consumerism, which are social activities derived from the social stratification of people and the division of labor; the social institutions of the feudal period that have continued to the modern era.

<span class="mw-page-title-main">Law of demand</span> 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 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.

<span class="mw-page-title-main">Demand curve</span> Graph of how much of something a consumer would buy at a certain price

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Positional goods are goods valued only by how they are distributed among the population, not by how many of them there are available in total. 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.

Conspicuous conservation describes consumers who purchase environmentally friendly products in order to signal a higher social status.

This glossary of economics is a list of definitions containing terms and concepts used in economics, its sub-disciplines, and related fields.

References

  1. 1 2 Banuri, Sheheryar; Nguyen, Ha (2020). "Borrowing to Keep Up (With the Joneses): Inequality, Debt, and Conspicuous Consumption". SSRN Electronic Journal. doi:10.2139/ssrn.3721084. hdl: 10986/34351 . ISSN   1556-5068. S2CID   233752235.
  2. ↑ Veblen, T. B. (1899). The Theory of the Leisure Class. An Economic Study of Institutions. London: Macmillan Publishers.
  3. ↑ Campbell, Colin (2018). The Romantic Ethic and the Spirit of Modern Consumerism | SpringerLink (PDF). doi:10.1007/978-3-319-79066-4. ISBN   978-3-319-79065-7.
  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". Science. 318 (5854): 1305–1308. Bibcode:2007Sci...318.1305F. doi:10.1126/science.1145876. ISSN   0036-8075. PMID   18033886. S2CID   44951330.
  5. ↑ Hirsch, Fred (2013-10-01). Social Limits to Growth. Harvard University Press. doi:10.4159/harvard.9780674497900. ISBN   978-0-674-49790-0.
  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.
  7. ↑ Goldstein, Robin (2019-06-03). Economic Experiments in Honor of Thorstein Veblen (These de doctorat thesis). Bordeaux.
  8. 1 2 3 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. JSTOR   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.
  11. 1 2 3 Eaton, B. Curtis (2012), "Veblen Goods", The New Palgrave Dictionary of Economics, 2012 Version, Basingstoke: Palgrave Macmillan, pp. 14276–14278, doi:10.1057/978-1-349-95189-5_2321, ISBN   978-1-137-33658-3
  12. 1 2 3 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.
  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.
  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 . Retrieved 2021-04-23.
  16. ↑ Hopkins, Ed; Kornienko, Tatiana (2004). "Running to Keep in the Same Place: Consumer Choice as a Game of Status". American Economic Review. 94 (4): 1085–1107. doi:10.1257/0002828042002705. hdl: 20.500.11820/6fdf6159-96b0-415b-a7b5-bb95caa924be . ISSN   0002-8282.
  17. ↑ Frank, Robert H. (1985). "The Demand for Unobservable and Other Nonpositional Goods". The American Economic Review. 75 (1): 101–116. ISSN   0002-8282. JSTOR   1812706.
  18. ↑ Eaton, B. Curtis; Matheson, Jesse A. (2013-07-01). "Resource allocation, affluence and deadweight loss when relative consumption matters". Journal of Economic Behavior & Organization. 91: 159–178. doi:10.1016/j.jebo.2013.04.011. ISSN   0167-2681.
  19. ↑ Aronsson, Thomas; Johansson-Stenman, Olof (2008-06-01). "When the Joneses' consumption hurts: Optimal public good provision and nonlinear income taxation". Journal of Public Economics. 92 (5–6): 986–997. doi:10.1016/j.jpubeco.2007.12.007. ISSN   0047-2727.
  20. ↑ Tanninen, Hannu; Tuomala, Matti (2008). Work Hours, Inequality and Redistribution: Veblen Effects Reconsidered. Tampereen yliopisto. ISBN   978-951-44-7584-9.
  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". Ecological Economics. 134: 40–48. Bibcode:2017EcoEc.134...40J. doi:10.1016/j.ecolecon.2016.12.016. ISSN   0921-8009.
  22. 1 2 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. S2CID   229451267.
  23. ↑ "Price tag can change the way people experience wine, study shows". news-service.stanford.edu. 2008-01-15.
  24. ↑ Galatin, M.; Leiter, Robert D. (1981). Economics of Information. Boston: Martinus Nijhoff. pp.  25–29. ISBN   978-0-89838-067-5.
  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. S2CID   145211986.
  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. JSTOR   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.
  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. JSTOR   796772.
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