Veblen Good

What Is a Veblen Good?

A Veblen good is a good for which demand increases as the price increases, because of its exclusive nature and appeal as a status symbol. A Veblen good has an upward-sloping demand curve, which runs counter to the typical downward-sloping curve. However, a Veblen good is generally a high-quality, coveted product, in contrast to a Giffen good, which is an inferior product that does not have easily available substitutes.

Understanding a Veblen Good

The increase in demand for a Veblen good reflects consumer tastes and preferences, unlike a Giffen good, a Veblen good is where higher demand is directly attributable to the price increase. The term is named after the American economist Thorstein Veblen, who is best known for introducing the term “conspicuous consumption.”

Veblen goods are fairly commonplace, unlike Giffen goods which are elusive and quite difficult to identify. Very expensive products, such as designer jewelry, pricey watches, yachts, and luxury cars that are marketed as being “exclusive,” or which convey the appearance of success, can be classified as Veblen goods.

Veblen goods are generally targeted at affluent individuals, have a very strong brand identity that is synonymous with luxury, and are far more likely to be sold in upscale boutiques than in common department stores. For all intents and purposes, a Veblen good is a luxury item that a majority of the population will not or cannot purchase.

Contradiction to Conventional Market Forces

Veblen goods contradict the basic law of demand, which states that quantity demanded has an inverse relationship with price, because of their exclusivity appeal. If the price of a coveted and expensive product is increased, it may actually enhance its appeal to the status-conscious, since it is now further out of reach for the average consumer.

But if the price of such a product is lowered, its exclusive appeal may diminish resulting in it being shunned by status-conscious consumers, while at the same time still being too expensive for the mass market. Overall demand would therefore decline with lower prices, instead of increasing.

While there is no specific price point that can be identified as the dividing line between a Veblen good and a normal product, it may be safe to assume that a Veblen good is generally priced exponentially higher than a basic product in the same category. Take the case of watches. Good-quality watches are widely available for less than $100, but to qualify as a Veblen good, a watch would probably carry a four, five, or six-digit price tag.

Behavioral Impact of a Veblen Good

Studies indicate that people are happier and receive more utility with the purchase of a Veblen good. This is a result of the good making the individual feel more exclusive and important, with the knowledge that they are purchasing something of high quality that is out of reach for others. Many individuals believe this is worth the premium they pay.

Sometimes, when a good is priced high, an individual will automatically assume it to be of better quality, when in fact it is not necessarily so. Many companies source or produce their goods in the same regions or factories, but because of marketing and brand identity, some are sold at a premium.

Consumers automatically associate the higher price with better quality. If the price is increased on the same good, consumers may then perceive this as improved quality and are willing to pay the higher price.

Similarly, when a good is perceived as difficult to purchase, an affluent consumer is willing to pay more for it. This is commonly seen in the art world. Paintings from deceased artists, such as Picasso or Monet, fetch millions of dollars, due to the fact that a limited quantity exists. The price does not necessarily reflect the quality of the art but the fact that the artist's paintings are not readily available in society.