Written by Joshua Ravichandran
What are the first things that come to mind when you think of a Ferrari? Probably something that’s red, fast, and most definitely expensive. Despite its astronomically high price, Ferrari cars are sold out many years in advance because the demand for one is so high. This is the opposite of what’s expected based on the law of demand, but that’s because a Ferrari is a Veblen good.
Veblen goods are products that increase in demand as the price rises, resulting in an upward sloping demand curve instead of a downward sloping demand curve. This phenomenon was first explained by Thorstein Veblen in 1899 in his book The Theory of the Leisure Class. Veblen hypothesized that certain expensive goods aren’t purchased in spite of their price but instead because of their high price. Veblen introduced the idea of conspicuous consumption, which is now more commonly known as a status symbol. This is a good that is purchased to portray one’s status. This means that wealthy individuals purchase these goods on the basis that they are expensive. Veblen goods seem to violate the law of demand because the higher the price of a good the more people want it.
There are many reasons why people are attracted to Veblen goods. The first is that a higher price is perceived as an indication of higher quality. It is important to be cautious when thinking this way, as sometimes a higher price does not equate to better quality. A famous example of this comes from the whiskey brand Chivas Regal. Chivas Regal struggled to sell their product when they initially launched, however they decided to raise their price. Keeping all things constant except the new higher price, Chivas Regal had an explosion of sales. People were drawn to Chivas Reglas because they assumed it must be higher quality with a high price tag, and it resulted in more demand with an increased price. This illustrates the irrational behavior of some veblen goods. Companies that market themselves as luxury with a higher price point have been found to get their products from the same suppliers as more budget alternatives. Not every expensive product is poor quality, but even if it is they often come as some type of status symbol.
Status symbols are the second main reason why people are attracted to Veblen goods. Since Veblen goods are tied to conspicuous consumption, a higher price is something that is unachievable for the masses. A Ferrari isn’t only an incredible car, it’s also something that is out of reach for a majority of the world. By owning a Ferrari, it places people into a different social class and that is directly a result of the high price. The more people who are hoping to be perceived as in a high social class, the more demand there is for cars. This is also true for diamonds. Diamonds are not particularly rare, but through intense marketing and strategic business decisions the price for diamonds is quite high. Unlike your groceries, most people want the most expensive diamond they can afford for their wedding ring. Since a higher price diamond makes it more desirable to display status, they are also considered a Veblen good.
Veblen goods are not unique to products, it is also seen in services. For instance, if someone is looking to hire a lawyer, they want to choose the best possible person. If given two options, one who charges $50 an hour and another who charges $1,000 an hour, it seems like the $1,000 lawyer must be worth their price. Major corporations are likely to hire who they think is best, so the demand for that lawyer is higher. In reality, the $50 lawyer could be just as good, but the lower price makes them appear as the “worse” or budget alternative. Veblen goods are a unique category in the world, but they are easy to spot. The key signs for a Veblen good is part of the appeal is the high price. As a consumer, it is up to you to figure out if the status is worth the extra premium. If you realize the status isn’t for you, you should follow the law of demand and buy less when the price is higher.
References:
Chen, James. “Veblen Good”. Investopedia, 30 November 2020,:https://www.investopedia.com/terms/v/veblen good.asp
Finch, Carol. “What is the Chivas Regal Effect”. Bizfluent, 26 September, 2017; https://bizfluent.com/facts-7569473-chivas-regal-effect.html
Finkle, Colin. “What Is a Veblen Good? BMB: Brand Marketing Blog; https://brandmarketingblog.com/articles/ branding-definitions/veblen-good/.
Veblen, Thorstein, 1857-1929. The Theory of the Leisure Class. New York, N.Y., U.S.A. Penguin Books, 1994.