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Veblen Good

A type of luxury good named after American economist Thorstein Veblen

What is a Veblen Good?

Veblen good is a type of luxury good named after American economist Thorstein Veblen. It shows a positive relationship between price and demand, and thus an upward-sloping demand curve.

The demand for a Veblen good rises (drops) when its price increases (decreases). A Veblen good generally is considered a high-quality product and a status symbol. When the price gets higher, its status symbol makes the Veblen good more desirable to consumers with high social and economic standing. Some common examples of Veblen goods include luxury cars, wines, and fine jewelry.

 

Summary

  • Veblen goods are luxury goods and appeal as a high quality and status symbol.
  • Veblen goods take on an upward-sloping demand curve, for which the quantity of demand increases (decreases) as the price increases (decreases).
  • Veblen goods come with snob value status, a premium that consumers are willing to pay for the exclusive products that are different from the commonly preferred ones.

 

Veblen Good and the Law of Demand

Veblen good is an exclusion to the law of demand, which is a concept of microeconomics. It states that the price and quantity of demand for goods demonstrate an inverse relationship as a result of the substitute effect.

When the price of good increases, the quantity of demand decreases, and when the price drops, the quantity of demand increases. However, due to its specific features as a luxury, a Veblen good will see a higher demand when its price increases. The diagrams below show the two kinds of demand and price relationships for normal goods (which follow the law of demand) and Veblen goods (which violate the law of demand).

 

Veblen Good

 

Veblen Good - Demand vs Price

 

Besides Veblen goods, Giffen goods are another type of non-ordinary goods that are contrary to the law of demand. Unlike Veblen goods, Giffen goods are low-income, non-luxury products with few close substitutes.

It is more difficult to identify Giffen goods than Veblen goods. Giffen goods also assume an upward-sloping demand curve, but their demand is impacted by income pressures (income effect) and lack of close substitutes (substitution effect). Some examples of Giffen goods include rice, wheat, and bread, which are generally essential goods.

 

Veblen Good – Snob Effect

The abnormal demand for Veblen goods is influenced by the snob effect, a situation that consumers prefer to own exclusive products that are different from the commonly preferred ones. It leads to a higher demand for a product when its price increases.

If the price of the product decreases, its snob appeal diminishes, which makes it less desirable to wealthy consumers. Generally, the fewer items available in the market, the higher their snob values are. Veblen goods are a typical sort of product with snob value status.

The snob value of a product can be identified through its demand curve. Sometimes, a Veblen good can take on a downward-sloping demand curve and show the characteristics of normal goods at lower prices. When the price is above a certain level, the snob effect starts to play a role in turning the demand curve upward. The product turns into a Veblen good and starts to assume snob value.

In the diagram shown below, when the price is below P1, the product is just a normal good for which the customers are more willing to purchase when the price gets lower. When the price is high enough (above the level of P1), the product becomes a Veblen good, and the customers are more willing to pay higher prices for its exclusive nature and status symbol. The price that the customers are willing to pay above the price level of a normal good (P1) is the snob value of that product.

 

Veblen Good - Snob Effect

 

For example, smartphones are normal goods in general. Consumers are price-sensitive and more willing to buy the ones at lower prices. When the price of a smartphone, such as the Lamborghini or Vertu, is above a certain level, the phone becomes a Veblen good, and the demand is driven by the snob effect.

 

Veblen Good and Conspicuous Consumption

Conspicuous consumption is another relevant concept of Veblen goods. It represents the purchase of goods and services to display one’s economic power and social status, motivated by the desire of prestige.

The concept of conspicuous consumption is also identified by Thorstein Veblen in his book, The Theory of the Leisure Class (1899). In the practices of conspicuous consumption, a higher price makes a product more desirable for its status symbol, which explains the features of Veblen goods from a sociological perspective.

Originally, the concept of conspicuous consumption is exclusively applied to the upper (leisure) class. With improvements in the standard of living in the twentieth century, such socio-economic behavior can also be observed among the middle class who possess discretionary income. Some research also found conspicuous consumption common to the lower class, e.g., the purchase of oversized jewelry by lower-income individuals.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Economics of Production
  • Supply and Demand
  • Conspicuous Consumption
  • Network Effect

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