Veblen Goods

What are Veblen Goods?

Veblen Goods are those types of luxury goods that result in a demand increase as a result of a price increase. This is clearly in contradiction to the law of demandLaw Of DemandThe Law of Demand is an economic concept that states that the prices of goods or services and the quantity demanded are inversely related when all other factors remain constant. In other words, when the price of a product rises, its demand falls, and when its price falls, its demand rises in the market.read more. wherein, as the price of good increases, there is a corresponding drop in the demand. Veblen goods are named after the American economic theorist Thorstein Bunde Veblen who identified this pattern of consumption and wrote about this in one of his works namely ‘the theory of the leisure class’.

Examples of 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 as a result of rising prices because there are people who would want to indirectly proclaim that they are classy, rich, and/or stylish.

Let us suppose the price of a Birkin bag plummets down drastically, rich women would be relatively uninterested to buy them because they cannot henceforth display their status or class if they purchase them. Because of the distinctiveness of such goods, we cannot find such goods in a local or a departmental store, they would be made available in exclusive brand stores.

The price-elasticity of such goods would be positive.

Veblen-Goods

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Source: Veblen Goods (wallstreetmojo.com)

Demand Curves for Veblen Goods

The Demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more for Veblen goods would look like this:

Demand Curve 1

The diagram/graph above represents the direct relationship between demand and price of the Veblen goods as opposed to the law of demand which says 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 graph of the normal goods and the graph for the Veblen goods.

Demand curve 2

The part of the curve represented by OA is the graph of a Veblen good whereas the part of the curve represented by ob is the graph of a normal good.

This abnormal market behavior these goods display is called “The Veblen Effect”.

Example of Veblen Goods

Let us now study this effect with the help of a real-life example of the popularly expensive commodity: iPhone.

iPhone is a chain of smartphones designed, developed, and marketed by apple inc. It can be a perfect example of a Veblen good because more than for the quality of services offered by the phone, it is purchased for its image associated with prestige.

The sales of the phone have consistently been making up for about 60% of Apple’s revenue in recent years.

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 are the prices clearly 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 as a means of showing off income and riches and not primarily for the intrinsic value of those goods and/or services.

Types of Veblen Goods

Veblen classified this consumption behavior into two types namely –

  1. Invidious Comparison – It means the desire of a person not to be perceived as a member of the lower class. This is a type of conspicuous consumption where a person consciously consumes goods that are not consumed by the lower-income group. At their own discretion, they incur huge costs to differentiate themselves from the lower-income group.
  2. Pecuniary Emulation – It means the desire of a person to be perceived as a member of the upper class. This is more prevalent when compared to the invidious comparison. It occurs when a person from the lower-income group tries to portray through a consumption pattern that he belongs to a class higher.

To differentiate and clarify, invidious consumption is done by the upper class whereas pecuniary emulation is done by the lower or middle-income groups.

Advantages

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

Others in society may gain inspiration from them to strive hard and attain a parallel level of riches.

Disadvantages

  • The consumer of the goods may be prey to unwanted attention and envy.
  • He/she would have the risks of larceny and pilferages.
  • He/she would be subject to resentments in society because of the supremacy.
  • An increase in price always need not necessarily mean an increase in quality of the goods and/or services.

All said and done, 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?’

There is no one particular reason. It may be for gaining a relative advantage or a competitive edge over others, to be clearly distinguished from the lower classes or enhancement of status, etc. It always comes with its own costs and benefits as stated above.

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This has been a guide to what is Veblen Goods and its definition. Here we discuss types, examples, and demand curves for Veblen goods. Here we also discuss the advantages and disadvantages. You can learn more about accounting from following articles –

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