What are 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. 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.”

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.

Suppose the price of a Birkin bag plummets drastically; rich women would be relatively uninterested in buying them because they cannot subsequently display their status or class if they purchase them. Although we cannot find such goods in a local or a departmental store because of their distinctiveness, they would be made available in exclusive brand stores.

The price elasticity of such goods would be positive.

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Demand Curves for Veblen Goods

The demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.read more 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.

These goods’ abnormal market behavior is called “The Veblen Effect.”

Example of Veblen Goods

Let us now study this effect with the help of a real-life example of the popularly expensive commodityCommodityA commodity refers to a good convertible into another product or service of more value through trade and commerce activities. It serves as an input or raw material for the manufacturing and production units.read more: The iPhone.

iPhone is a chain of smartphones designed, developed, and marketed by Apple Inc. It can be a perfect example of a Veblen good because more than the phone’s quality of services, it is purchased for its image associated with prestige.

Phone sales have consistently made up about 60% of Apple’s revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more.

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.

Types of Veblen Goods

Veblen classified this consumption behavior into two types, namely:

  • 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 Consumes GoodsConsumer goods are the products purchased by the buyers for consumption and not for resale. Also referred to as final products, examples of consumer goods include an Apple cellphone or a box of Oreo cookies. Consumer goods companies and the industry offer a vast range of products that heavily contribute to the global economy.read more 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.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.

Advantages

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.

Disadvantages

  • 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.

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.

This article is a guide to What are Veblen Goods. Here, we discuss Veblen goods examples, advantages, disadvantages, types, and the Veblen goods demand curve. You can learn more about accounting from the following articles: –

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