Updated September 26, 2023
What are Veblen Goods?
Veblen goods are luxury goods whose demand curve has a positive slope, meaning that as their price rises, the demand for the product rises too, and vice-versa.
They get their name from the American economist Thorstein Bunde Veblen. He introduced the concept of “conspicuous consumption” (the concept of buying goods and services to display one’s wealth and status) in his book “The Theory of the Leisure Class.”
These goods are usually superior in quality, exclusive, and premium and act as status symbols. They have a strong brand identity, and their main target market is the “rich.” For example, luxury cars, designer clothes, handbags, diamonds, etc. They are usually non-necessary goods, exclusively sold in high-end shops and boutiques.
Table of Contents
Key Highlights
- A Veblen good is a luxury item whose demand increases with an increase in price and vice-versa.
- People buy these goods either to distinguish themselves from the lower class or as an aspiration to be seen as a member of the affluent class.
- They have an upward-sloping demand curve in contradiction with the law of demand.
- Giffen goods also contradict the law of demand, but they are different from Veblen goods because they are necessary goods like rice, wheat, etc.
Why do People Purchase Veblen Goods?
Veblen goods do have less expensive substitutes, but people still choose to buy them. So, what are the main reasons for which people purchase these goods? According to Thorstein Veblen, two types of consumer behaviors explain the Veblen effect or conspicuous consumption.
1. Invidious Comparison
People buy Veblen products to show their social status and not be compared to the lower class. For them, the main attraction of the product is its extremely high price, which makes it exclusive and unattainable to the general public. So, if the price of the good were to decrease even slightly, the demand would also decrease as its exclusivity is in danger.
2. Pecuniary Emulation
Another set of people who buy these goods are those who want to be seen as a higher class member. They spend a fortune on Veblen goods to give an impression of wealth to others.
More Examples
Demand Curve
The below Demand Graph compares the demand curve for normal goods vs. Veblen goods.
Where,
- The x-axis represents the quantity demanded by consumers.
- The y-axis represents the price of the products.
We can observe the following from the graph,
1. Normal Goods Curve:
The curve for the normal goods (green) slopes downwards because the demand and price are inversely proportional for normal goods, i.e., as the price of these goods decreases, the demand increases.
2. Veblen Goods Curve:
The curve for Veblen goods (orange) is upward-sloping because when the prices increase, demand increases, too.
3. Veblen Vs. Normal Goods Curve:
Now, as we compare both curves, we can see that both curves move in opposite directions.
Veblen Goods Vs. Giffen Goods
People often confuse Veblen goods with Giffen goods as both have an upward-sloping demand curve. However, there are many differences between the two.
| Aspect | Veblen Goods | Giffen Goods |
| Meaning | These are non-necessary and luxury items. | These are inferior goods that are usually essential. |
| Examples | Sports cars, designer clothes, etc. | Rice, bread, wheat, potatoes, etc. |
| Consumer’s motive behind purchase | People buy these to feel superior and separate themselves from the lower class. | People have to buy Giffen goods at high prices because they are essential, and there’s no substitute available. |
| Reason for High Prices | They have high prices because of the soaring demand for such goods. | The price of Giffen goods like rice or wheat rises because of a shortage of supply. |
| Substitutes Availability | You can easily find less expensive substitutes. | These goods have no close substitutes. |
| Effect of Prices on Demand | The demand will decrease with a decrease in price as it loses prestige and exclusivity. | The demand for Giffen goods increases with a price decrease. |
Q2. Is the iPhone a Veblen good?
Answer: Yes, we can say that an iPhone is a Veblen good as its demand keeps increasing with price, and it is known as a status symbol in many parts of the world. A large number of people buy iPhones due to the prestige value alone.
Q3. What are the characteristics of Veblen goods?
Answer: Veblen goods display the following characteristics:
- Their demand rises as their price rises
- They don’t abide by the ordinary laws of supply and demand
- They are high-end products
- Customers are psychologically motivated to purchase these goods to show their high status.
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