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.

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.

• 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 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.

Veblen classified this consumption behavior into two types, namely:

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 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 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.

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 commodity: 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 revenue.

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

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.

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.

The demand curve for Veblen goods would look like this:

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.

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.”

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.

• 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.

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.

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: -

• Income Elasticity of Demand
• Examples of Elasticity of Demand
• Demand Elasticity
• Elastic vs Inelastic Demand