Sociology Index

VEBLEN EFFECTS

Veblen effect is a theoretical anomaly. The Veblen effect belongs to a family of theoretically possible anomalies in the general theory of demand. A product may have a Veblen effect because it is a positional good, something few others can own. Thorsten Veblen was the first to identify the concepts of Conspicuous Consumption and status-seeking in 1899. The theory of Veblen Effects arise from the desire to achieve social status by signaling wealth through conspicuous consumption. Veblen Effects arise from the desire to achieve social status by signaling wealth through symbolic communication. There is also a Counter-Veblen Effect, where people believe they will be admired for buying bargains or rather for being prudent in their purchases.

Successful brands rely on supplementing consumer experience with a range of Veblen goods, in which the demand for Veblen goods such an Apple iPhone increases even if the unit price increases, as you pay a premium for the status conferred to you through its ownership and consumption. The term, Conspicuous Consumption, as used by Thorsten Veblen, conveys the idea of a society where social status is earned and displayed by patterns of consumption and consumer culture, rather than by what an individual does or makes.

Preference for exclusive goods is because they are different from those commonly preferred is the Snob Effect, which is similar to Veblen Effect. Other related concepts to Veblen Effects include Counter-Veblen Effect, Symbolic Communications and Inconspicuous Consumption. Bandwagon Effect, Snob Effect, and Veblen Effect are discussed in Theory of Consumers' Demand. Veblen Effect is generally caused by the belief that higher price means higher quality. Veblen effect is also caused by the desire for conspicuous consumption of an expensive, prestige good.

There is also a concept of counter-Veblen effect, Giffen Good, where higher price leads to higher demand but for different reason to Veblen good. Demand rises with higher price because the income effect of higher price outweighs the substitution effect. When preference for a good increases as the number of people buying them increases, we call it the bandwagon effect, again similar to veblen effect.

Where lies the general boundary between Veblen Good and Giffen Good? Does this boundary apply in all countries?
David Boansi.

By the law of demand, increasing price of a commodity is (all things being equal) expected to dampen demand for that commodity. However, demand for Veblen goods and Giffen goods is in contradiction with the usual law of demand. In as much as Veblen goods are linked to the notion of "it is more expensive, it must be of better quality", Giffen goods are linked to the notion of "that's all we have and can afford: limitation of choice".

Differences in availability of commodities and the role they play across countries tend to blur Veblen goods and Giffen goods identification. For example, in as much as a commodity "A" may be what a country "V" has to depend on and can afford (in which case it may serve as a potential Giffen good), such commodity may be very scarce in another country "G" although of a very high importance/relevance (thereby stimulating demand for it even when prices increase). This creates somewhat room for confusion in distinguishing between the two aforementioned goods.

Veblen Effects in a Theory of Conspicuous Consumption - Bagwell, Laurie Simon, Bernheim, B Douglas.
The authors examine conditions under which Veblen Effects arise from the desire to achieve social status by signaling wealth through conspicuous consumption. While Veblen effects cannot ordinarily arise when preferences satisfy a 'single-crossing property,' they may emerge when this property fails. In that case, 'budget' brands are priced at marginal cost, while 'luxury' brands, though not intrinsically superior, are sold at higher prices to consumers seeking to advertise wealth. The authors explore factors that induce Veblen effects and they investigate policy implications.

Leibenstein (1950), has discussed these effects in an article titled 'Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand' - Quarterly Journal of Economics 64 (2).

Steiner, Robert L. and Weiss, Joseph (1951), Veblen Effects Revisited in the Light of Counter-Snobbery, Journal of Aesthetics and Art Criticism, 9, 263-268.