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Veblen good

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Luxury cars are often stated to be desirable due to their price, which generates a certain amount of status. As a result it is argued that luxury cars are Veblen goods.

In economics, Veblen goods are a theoretical group of commodities for which peoples' preference for buying them increases as a direct function of their price, instead of decreasing according to the theory of supply and demand.

It is claimed that some types of high-status goods, such as diamonds or luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products.[1] Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable. The Veblen effect is named after the economist Thorstein Veblen, who first pointed out the concepts of conspicuous consumption and status-seeking.[2]

[edit] Related concepts

A bottle of Louis Roederer Cristal (1993)

The Veblen effect is one of a family of theoretically possible anomalies in the general theory of demand in microeconomics. Other related effects include:

  • the snob effect: preference for goods because they are different from those commonly preferred; in other words, for consumers who want to use exclusive products, price is quality;[3]
  • the bandwagon effect: preference for a good increases as the number of people buying them increases (see network externality);
  • although some have suggested (Lea 87) that there is also a 'counter-Veblen' effect: preferences for goods increasing as their price falls, this is in essence merely traditional supply and demand theory

The first two of these, and the Veblen effect, are discussed in a classic article by Leibenstein (1950).[4] The concept of the counter-Veblen effect is less well known, although it logically completes the family.[5]

None of these effects in itself predicts what will happen to actual quantity of goods demanded (the number of units purchased) as prices change—they refer only to preferences or propensities to purchase. The actual effect on quantity demanded will depend on the range of other goods available, their prices, and their substitutabilities for the goods concerned. 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.

The interaction effects are a different kind of anomaly from that posed by Giffen goods. The Giffen goods theory is one for which observed demand rises as price rises, but 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 change in price.

Recent research has begun to examine the empirical evidence for the existence of goods which show these interaction effects.[6] The Yale Law Journal has published a broad overview.[7] Studies have also found evidence suggesting people receive more pleasure from more expensive goods.[8]

[edit] References

  1. ^ Wood, John C. (1993). Thorstein Veblen: Critical Assessments, 352. London: Routledge. ISBN 0-415-07487-8.
  2. ^ Veblen, T. B. (1899). The Theory of the Leisure Class. An Economic Study of Institutions. London: Macmillan Publishers.
  3. ^ Galatin, Malcolm and Robert D. Leiter (1981). Economics of Information, 25-29. Boston: Martinus Nijhoff Publishers. ISBN 0-898-38067-7.
  4. ^ Leibenstein, H. (1950). Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’ Demand. Quarterly Journal of Economics, 64, 183–207.
  5. ^ Lea, S. E. G., Tarpy, R. M., & Webley, P. (1987). The individual in the economy. Cambridge: Cambridge University Press. ISBN 0-521-26872-9.
  6. ^ e.g. Chao, A., & Schor, J. B. (1998). Empirical tests of status consumption: Evidence from women's cosmetics. Journal of Economic Psychology, 19, 107–131.
  7. ^ e.g. McAdams, Richard H. (1992). Relative Preferences. Yale Law Journal, vol. 102, no. 1 (October), pages 1-104.
  8. ^ Price tag can change the way people experience wine, study shows
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