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Veblen good

From Academic Kids

A commodity is a Veblen good if people's preference for buying it increases as a direct function of its price.

The definition does not require that any Veblen goods actually exist. However, it is claimed that some types of high-status goods, such as expensive wines or perfumes are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products. The Veblen effect is named after the economist Thorstein Veblen, who invented the concepts of conspicuous consumption and status-seeking.

The Veblen effect is one of a family of theoretically possible anomalies in the general theory of demand in microeconomics. The other related effects are:

  • the snob effect: preference for a good decreases as the number of people buying it increases;
  • the bandwagon effect: preference for a good increases as the number of people buying it increases;
  • the counter-Veblen effect, in which preference for a good increases as its price falls.

The first two of these, and the Veblen effect, are discussed in a classic article by Leibenstein (1950). The concept of the counter-Veblen effect is less well known, though clearly it is logically needed to complete the family; it was introduced by Lea et al (1987).

Note that none of these effects in itself predicts what will happen to actual demand for the good (the number of units purchased) as price changes - they refer only to preferences or propensities to purchase. The actual effect on demand will depend on the range of other goods available, their prices, and their substitutabilities for the goods concerned. The effects are anomalies within demand theory because the theory normally assumes that preferences are independent of price or the number of units being sold. They are therefore collectively referred to as interaction effects.

Note too that the interaction effects are a different kind of anomaly from that posed by a Giffen good. A Giffen good is one for which observed demand rises as price rises, but the effect arises without any interaction between price and preference - it results from the interplay of the income effect and the substitution effect of a change in price.

Recent research (e.g. Chao and Schor, 1998) has begun to examine the empirical evidence for the existence of goods which show these interaction effects.

References

  • Chao, A., & Schor, J. B. (1998). Empirical tests of status consumption: Evidence from women's cosmetics. Journal of Economic Psychology, 19, 107-131.
  • Lea, S. E. G., Tarpy, R. M., & Webley, P. (1987). The individual in the economy. Cambridge: Cambridge University Press.
  • Leibenstein, H. (1950). Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’ Demand. Quarterly Journal of Economics, 64, 183-207.
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