FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Veblen Goods

Updated on April 23, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Veblen Goods?

Veblen goods are luxury goods that result in a demand increase due to a price increase. Therefore, it contradicts the law of demand. As the price of goods increases, there is a corresponding drop in demand.

What Are Veblen Goods

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Veblen Goods (wallstreetmojo.com)

Such goods are designer handbags, branded watches, diamond jewelry, and services such as Star luxury hotels, lounges, etc. The demand for such goods and services would rise due to rising prices because people would want to indirectly proclaim that they are classy, rich, and/or stylish.

Key Takeaways

  • Veblen goods refer to luxury goods that result in an increase in demand due to a price rise. Hence, it differs from the law of demand. As the goods price increases, there is a corresponding decline in demand.
  • This name is after the American economist Thorstein Bunde Veblen. He identifies the consumption pattern and writes this in one of his works, “The Theory of the Leisure Class.”
  • The types of Veblen goods are invidious comparison and pecuniary emulation.
  • Conspicuous consumption refers to goods and services consumption or expansion to display income and riches, not primarily for the intrinsic value of goods and services.

Veblen Goods Explained

Veblen goods are named after the American economist Thorstein Bunde Veblen, who identified this consumption pattern and wrote concerning this in one of his works, “The Theory of the Leisure Class.” The Veblen goods meaning is completely opposite to how the market is expected to work. Normally, consumers opt for products that are budget-friendly and choose high-priced products only in the case of essential goods. However, the consumers demand these goods when the prices are high as they proclaim those items as a symbol of rich status and a posh lifestyle.

The Veblen goods are luxurious items, which attract customers despite the rising prices. Today, consumers are more lifestyle-driven and in competition with other individuals around to prove how well off they are from other people. This is what leads to the rise in the demand for such products.

Eventually, one would ask, ‘Why would a person practice such a consumption when cheaper alternatives are always available?’ or ‘Why does someone gain sheer pleasure from being overcharged?’ Well, there is no particular reason.

It may be to gain a relative advantage or a competitive edge over others, be distinguished from the lower classes, enhance their status, etc. However, it always comes with costs and benefits, as stated above.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Veblen Goods Explained in Video

 

Types

Veblen classified this consumption behavior into two types, namely:

Types of Veblen Goods

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Veblen Goods (wallstreetmojo.com)

  1. Invidious Comparison – Invidious comparison means a person’s desire not to be perceived as a lower-class member. Such is a type of conspicuous consumption where a person consciously consumes goods Consumes GoodsConsumer goods are the products purchased by the buyers for consumption and not for resale. Also referred to as final products, examples of consumer goods include an Apple cellphone or a box of Oreo cookies. Consumer goods companies and the industry offer a vast range of products that heavily contribute to the global economy.read more that the lower-income group does not use. As a result, they incur huge costs to differentiate themselves from the lower-income group at their discretion.
  2. Pecuniary Emulation – Pecuniary emulation means a person’s desire to be perceived as an upper-class member. It is more prevalent when compared to the unfair comparison. It occurs when a person from the lower-income group tries to portray that he belongs to a class higher through a consumption pattern.
    For differentiation and clarification, invidious consumption is done by the upper class, whereas the lower or middle-income groups do pecuniary emulation.
  3. Invidious Comparison – Invidious comparison means a person’s desire not to be perceived as a lower-class member. Such is a type of conspicuous consumption where a person consciously consumes goods Consumes GoodsConsumer goods are the products purchased by the buyers for consumption and not for resale. Also referred to as final products, examples of consumer goods include an Apple cellphone or a box of Oreo cookies. Consumer goods companies and the industry offer a vast range of products that heavily contribute to the global economy.read more that the lower-income group does not use. As a result, they incur huge costs to differentiate themselves from the lower-income group at their discretion.
  4. Pecuniary Emulation – Pecuniary emulation signifies a person’s desire to be perceived as an upper-class member. It is more prevalent when compared to the unfair comparison. It occurs when a person from the lower-income group tries to portray that he belongs to a class higher through a consumption pattern.
    For differentiation and clarification, invidious consumption is evident in the upper class, whereas the lower or middle-income groups do pecuniary emulation.

Examples

Let us consider the following Veblen Goods examples to understand the concept better:

Example 1

Suppose the price of a Birkin bag plummets drastically. The rich women would relatively have less interest in buying them because they cannot subsequently display their status or class if they purchase them. Such goods are hardly available in a local or a departmental store because of their distinctiveness. Instead, they are available in exclusive brand stores.

The price elasticity of such goods would be positive.

Example 2

Let us now study this effect with the help of a real-life example of the popularly expensive commodityCommodityA commodity refers to a good convertible into another product or service of more value through trade and commerce activities. It serves as an input or raw material for the manufacturing and production units.read more: The iPhone.

iPhone is a chain of smartphones designed, developed, and marketed by Apple Inc. It can be a perfect example of Veblen goods because these phones are more of a status symbol that a device to communicate.

Phone sales have consistently made up about 60% of Apple’s revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more.

In 2007, Apple Inc. announced the first generation of phones. The following is the sales trend since then:

YearDevices Sold in Millions
20071.39
200811.63
200920.73
201039.99
201172.29
2012125.05
2013150.26
2014169.22
2015231.22
2016211.88
2017216.76
2018217.72

The trend above indicates that the sales have been on the rise ever since the introduction of the product, and so also the prices demonstrating the Veblen effect.

Thorstein Veblen says, “Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure.’’

Conspicuous consumption means the consumption or expansion of goods and/or services to show off income and riches, not primarily for the intrinsic value of those goods and/or services.

Demand Curve

The demand curve for Veblen goods would look like this:

demand curve for Veblen goods

The diagram/graph above represents the direct relationship between demand and price of the Veblen goods instead of the law of demand, which states that price and demand have an inverse relationship.

As we can see, as the price increases from P1 to P2, the quantity consumption increases from Q1 to Q2.

Let us now compare the normal goods graph and the Veblen goods graph.

Normal-goods-vs-Veblen-goods

The curve represented by OA is the graph of Veblen goods, whereas the part of the curve described by OB is the graph of normal goods.

Such abnormal market behavior is called “The Veblen Effect.”

Advantages

Apart from the benefits of the quality of goods/services consumed, the purchase and display of such goods can increase the esteem of the consumer and help them gain popularity and adoration.

Others in society may gain inspiration from striving hard and attaining similar riches.

Disadvantages

  • The consumer of the goods may be prey to unwanted attention and envy.
  • They would have the risks of stealing and pilferage.
  • They would be subject to resentment in society because of supremacy.
  • A price increase does not necessarily mean an increase in the quality of goods and/or services.

Veblen Goods Vs Giffen Goods

Giffen goods and Veblen goods have one thing in common – people buy them even if the prices are high. As the prices increase, people buy them more. Hence, the price is directly proportional to the demands in both cases. Thus, they both have an upward-sloping graph.

The major difference between the two, however, is:

  • The Giffen goods include essential items, which fall into the basic requirements category of consumers. On the contrary, the Veblen counterpart includes products that are luxury and not necessarily required.
  • Some examples of Giffen goods are grains, vegetables, etc., whereas the examples of Veblen goods are branded handbags, products endorsed by celebrities, etc.

Frequently Asked Questions (FAQs)

What is the difference between Veblen and Giffen goods?

Veblen goods refer to luxury goods. While Giffen goods refer to the inferior goods for which it has no substitutes. It is a non-luxury and non-income product whose demand increases as the price increases and vice versa.

What are the characteristics of Veblen goods?

A Veblen good is a high-quality good crafted exclusively and a status symbol. Wealthy consumers desire these goods and keep a premium on the goods’ utility. Therefore, the demand for such goods increases as the price increases.

What are the Veblen goods other name?

The other name for Veblen goods is “ conspicuous consumption.” It displays social status and is often associated with affluent people. Still, it can also apply to an economic class.

Recommended Articles

This article is a guide to what are Veblen Goods. Here we explain it with examples, vs Giffen goods, demand curve, advantages, disadvantages, and types. You can learn more about accounting from the following articles: –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *