Veblen goods are commodities

Veblen products are commodities with values that are directly proportional to their production (Weber, 2014). This commodities defy the law of demand, which states that demand and prices of goods are inversely related. In economics, an increase in the price of a given commodity causes a decrease in the number of people able to buy it, as shown in figure (a) below. Similarly, price reductions increase the number of acquisitions. As a result, the standard demand curve is normally slanted downward. Since price and demand shift in the same direction, the Veblen products have an upward sloping demand curve, as seen in figure (b). Veblen goods in economic are luxury goods socially known as expensive and exclusive (Bagwell & Bernheim, 1996). These goods in most cases are very high and only the affluent in the society afford to consume or use them.

(b)

Price

Price

0 0

Quantity

Quantity

Veblen good

Normal good

Figure 1: Demand curves for ordinary and Veblen goods (Uzgoren & Guney, 2012).

As shown in figure (b) above, the quantity of Veblen commodities purchased increases as price rises. The price of these goods corresponds to the status they give to the consumers. Individual consumers relate price to product exclusivity and quality, and this is why despite the high cost involve in acquiring Veblen product many would still want consumer them. In most cases, only rich celebrities and business persons purchase them (Weber, 2014). Today, Veblen good include commodities such as expensive jewelry, fashion design handbags, cars, and wines. Take, for example, Ferrari cars and luxury watches such as Rolex. These products have equivalent practical value to those with lower prices, but despite their high cost they still have higher demand in the market. Individuals possess these goods as a display of prestige and wealth. The price of these. From the figure (b) above, when the price of Veblen good declines it demands also falls proportionally.

Rationale for consumption

The consumption of Veblen occurs due to the impression of the high quality of the products and exclusivity (Barrington-Leigh, 2008). The high price charged for these goods create a perception that they have considerable economic value as well as prestigious. According to Thorsten Veblen-the investor of the Veblen effect – wealthy individual and affluent societies tend to consume highly conspicuous commodities because they believe that represent higher social status. The Veblen effect is the primary functional influence of the consumption of these products (Bagwell & Bernheim, 1996). The Veblen effect makes consumers have the willingness to pay higher prices for products that have equal practical value to those of lower prices. However, when the price of these commodities falls, most Veblen seekers would shift their focus to other goods available in the market. They demand of the Veblen goods would fall. Sometimes when a luxury product prices equal to non-luxury good some individual would purchase the Veblen items, though some Veblen seekers would hesitate (Weber, 2014). Thus, Veblen good, though having upward sloping demand curve still operate based on the inverse proportionality of price and demand to some extent though the response of the two variables is inconsistent with many points along the demand curve

Elasticity of Demand for Veblen Goods

The Veblen goods have a positive price elasticity of demand and income elasticity of demand. The increase in the price of Veblen goods increases the demand and hence positive price elasticity (Eaton & Eswaran, 2009). Take for example the luxurious Gucci handbags, when the price of these bags rises women would tend to buy more of them. Thus, the increase in the cost of acquiring the bags triggers high demand. Similarly, as the income of household increases, they tend to buy more of luxury goods. For example, when the income of celebrities and business persons increases they tend to buy more expensive products such as Rolls-Royce cars and high-quality wines. However, income does not play a significant role in the purchase of these products because they are bought and used as prestige and status rather than a source of practical utility.

Income and substitution effect

Veblen goods have less income effect compared to Giffen goods because they are meant to display high social status and prestige as opposed to economic value (Eaton & Eswaran, 2009). Thus when the prices of these products are high, we are likely to see less effect impose on the consumer's income because they have an unlimited budget. Rather than decrease the consumption, Veblen seekers would continue to acquire more of the Veblen products as they associate the price with the quality and exclusivity. These goods concern the rich in the society who buys when the price is high and stop when they notice a decline (Uzgoren & Guney, 2012). Therefore, the income effect among Veblen goods is small but moves in the negative direction. The rise in the price of the Giffen goods leads to high substitution rate. However, with Veblen goods, when a price increases individual tends to consume more of the product and therefore high positive substitution effect. The figures 2 and 3 below, points A and B represent

(c) (d)

B

Price of other goods

Price of other goods

B

A

A

Normal good

Quantity

0 0

Quantity

Veblen good

Figure 2. Income effect

(e) (f)

Price of other goods

Price of other goods

A=B

A

B

Substitution Effect

No Substitution Effect

Veblen good

Normal good

Figure 3: Substitution Effect (Eaton & Eswaran, 2009)

The figures 2 and 3 explains the income and substitution between Veblen goods and common goods. In figure 2 (c), an increase in the price of other commodities would reduce the amount of disposable income allocated by the poor on other goods and therefore a negative substitution effect. For low-income earners, allocation of disposable income to other commodities say necessities reduces the amount of revenue left to spend on others. In figure 2 (b), the changes in prices of other commodities have less affect the purchasing power of the wealthy. The high income would experience insignificant distraction from their consumption from the changes in prices (Weber, 2014). Therefore, the income effect would be negative but minimal. The income effect has a negligible effect on the consumption of these goods because the choices rely on exclusivity, quality, and status.

In figure 3 (e), the increase in the price of other commodities would call for consumers to look for other products with low cost but provide same utility. The result will be the reduction in the consumption of the high prices products. Besides, the common goods obey the laws of demand and individuals would not wish to continue spending on products whose prices is very high and therefore negative substitution effect. In 3 (f), the increase in the prices of other commodities creates not impact on the consumption of the Veblen goods (Barrington-Leigh, 2008). Veblen good seekers would continue to buy high priced products because they associate the high cost of these goods to high-value, prestige, and status.

The consumption of Veblen goods in an economy is a function of Veblen effect, snob effect, and hot and band fallacy. The Veblen effect is where a commodity demand increases because it is overpriced in the market. Snob effect is where a consumer prefers a product because it is different from the commonly preferred ones. They would purchase products because it signifies prestige and position (Uzgoren & Guney, 2012). The snob effect makes people view goods based on the number of consumers and the quality it presents. The users would prefer commodities that only a few peoples can afford and those that have high quality as depicted by their prices. Since the Veblen goods have substantial economic value but less practical value, the less it is available on the market, the higher the snob effect or snob value.

In conclusion, Veblen goods do not obey the law of demand. These products tend to have high demand when their prices increase. The most individual that consume them are the rich who want to maintain or show their status or wealth. The Veblen goods have substantial economic value but less practical one, and thus the poor do not use them. The Veblen items have a positive price and income elasticity that is their consumption increases with the rise in revenue and price level. Furthermore, they have minimal income and substitution effect because they represent position or status rather than practical value.

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References

Bagwell, L. S., & Bernheim, B. D. (1996). Veblen effects in a theory of conspicuous consumption. The American Economic Review, 349-373.

Barrington-Leigh, C. P. (2008). Veblen goods and neighborhoods: endogenising consumption reference groups.

Eaton, B. C., & Eswaran, M. (2009). Well‐being and Affluence in the Presence of a Veblen Good. The Economic Journal, 119(539), 1088-1104.

Uzgoren, E., & Guney, T. (2012). The snob effect in the consumption of luxury goods. Procedia-Social and Behavioral Sciences, 62, 628-637.

Weber, C. M. (2014). The Thinning of Veblen’s “Conspicuous Consumption” in the Modern Language of Economics. Retrieved November 27, 2014.