Readers Question: I once ran across a term and now can’t find it. It’s the economic theory that consumers will purchase a product or service which cost more money for the sole believe that it’s of higher quality due to its higher price. Is there a designated term for this?
A Veblen Good.
A veblen good is a good where demand rises as price rises. This is because people think more expensive goods are better quality, so people buy more. Studies suggest people do get more satisfaction from receiving expensive goods. It is possible that designer clothes or luxury cars may sometimes meet the criteria of veblen goods. This is often termed the snob effect – people equate price to quantity.
If veblen goods do exist the demand curve would slope the opposite way.
In recession and periods of frugality, there are few veblen goods, but possible many counter-veblen goods – where lower price makes demand increase more than proportional.
Rising House Prices and Rising Demand
With house prices and law of demand we looked at why rising house prices caused a rise in demand. Here it is not the snob effect at work, but maybe a bandwagon effect. Where people buy because prices are rising and therefore they expect them to keep rising.
4 comments ↓
This post reminded me of a similar situation: a Giffen good.
In fact, Veblen goods and Giffen goods seem to be extremely similar, and I was hoping you could clarify the difference between the two!
[...] Good and Giffen Good. In this post, we defined a Veblen Good (sometimes known as ostentatious [...]
Erm.. Veblen goods don’t ring true with me. If you look at utility theory and the law of demand, then for an individual they may well go for the snob effect and buy the fancy car BUT having bought the first car, the utility derived from the second car would be less. hence, the rational economic person would value it less. Hence at a point in time, the price they would place on the utility from the second car would be less. As a result their individual demand curve would slope downwards! Since the market demand curve is the horizontal summation of all individuals demand curves hey presto, the market demand curve would slope downwards. If the manufacturer raises prices in the future then we are in a different time frame but the same argument applies
[...] A Veblen Good is a good where demand is often greater when the price of it is higher. A veblen good is often termed as an ostentatious good. It is a good people consume because it is seen as exclusive and therefore a symbol of social status / wealth. A reduction in the price of the good may make it less attractive because it would no longer be seen as socially exclusive and indicative of social standing. [...]
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