What are Veblen Goods?
MA, Management Science (University College London)
Date Published: 03.06.2024,
Last Updated: 03.06.2024
Share this article
Definition
Veblen goods are those for which “the quantity of the goods demanded increases as the price increases” (Geoffrey Schneider, Microeconomic Principles and Problems, 2019). Examples of these types of goods include designer bags and clothes, high-end cars or watches.
While the term “Veblen goods” is often used interchangeably with “luxury goods,” they are not exactly the same. The main difference lies in the motivations behind consuming luxury versus Veblen goods. While the consumption of luxury goods can be motivated by a desire for quality and enjoyment, Veblen goods are solely consumed for their social implications with the intention of signaling status. This is described by Lilach Gidaly in The Price of Prestige:
If a good is consumed solely for its signaling value, it is considered a pure Veblen good, one that contributes to the welfare of any one individual only in so far as it affects that individuals relative consumption of the good; it provides no utility of its own accord. (2018)
Lily Gidaly
If a good is consumed solely for its signaling value, it is considered a pure Veblen good, one that contributes to the welfare of any one individual only in so far as it affects that individuals relative consumption of the good; it provides no utility of its own accord. (2018)
Theoretical background
The terms “Veblen good” and “Veblen effect” were coined by economist Harvey Leibenstein in his paper “Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand” (1950). Leibenstein's concept of Veblen goods was based on the observations of American economist Thorstein Veblen laid out in his book The Theory of the Leisure Class (Veblen, 1899).
Veblen started studying the social and economic behaviours of the American upper class during the late 19th and early 20th centuries, in the midst of significant economic change during the Industrial Revolution. He was interested in the shift from agrarian to industrial production, which led to rapid urbanization, creating new wealth for business pioneers. From his observations, he developed the theory of conspicuous consumption. In Veblen’s words,
In order to gain and to hold the esteem of men it is not sufficient merely to possess wealth or power. The wealth or power must be put in evidence, for esteem is awarded only on evidence. And not only does the evidence of wealth serve to impress one’s importance on others and to keep their sense of importance alive and alert, but it is of scarcely less use in building up and preserving one’s self-complacency. (1899, [2017])
Thorstein Veblen
In order to gain and to hold the esteem of men it is not sufficient merely to possess wealth or power. The wealth or power must be put in evidence, for esteem is awarded only on evidence. And not only does the evidence of wealth serve to impress one’s importance on others and to keep their sense of importance alive and alert, but it is of scarcely less use in building up and preserving one’s self-complacency. (1899, [2017])
Essentially, Veblen argues that wealthy individuals purchase more goods as their price increases, not because of their scarcity and exclusivity, but to display social status.
Leibenstein developed Veblen’s findings, delving into the consumption dynamics of these goods.
This study guide offers a detailed overview of Veblen goods, exploring their history, context, and practical implications in economic modeling.
The supply and demand model for Veblen goods
By now, it is clear that Veblen goods are consumed exclusively to indicate status and wealth. These goods are thought to defy the law of demand. Indeed, the demand for Veblen goods increases not as prices decrease, but as prices increase (Figure 1).
The fact that Veblen goods go against the law of demand has a by-product impact on the price elasticity of demand (PED) for these goods. PED is the responsiveness of consumer demand to a change in price. For most goods, elasticity is negative because an increase in the price leads to a decrease in the quantity demanded; price and demand have a negative or inverse relationship. However, Veblen goods are one of the few exceptions (along with Giffen goods, which we will return to) for which price elasticity of demand is positive, with an increase in price leading to a greater increase in the quantity demanded. As Steven Reeves explains in Microeconomics and Macroeconomics,
Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. (Steven Reeves, 2014)
Steven Reeves
Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. (Steven Reeves, 2014)
It is important to highlight that a key distinction between luxury and Veblen goods lies precisely in their elasticities. As noted, Veblen goods demonstrate positive price elasticity of demand, meaning their demand increases as prices rise. In contrast, luxury goods see an increase in demand only when a person’s wealth or income increases. In other words, luxury goods exhibit positive income elasticity of demand, which differs from price elasticity of demand. This subtle difference often leads to the common conflation of Veblen goods with luxury goods.
Overall, while luxury goods generally adhere to the conventional laws of demand, Veblen goods defy the law of demand by showing a positive response to price increases. You may read more about this in our study guide “What is Elasticity?”
Veblen goods in real life
So, what are some real-life examples of Veblen goods? Essentially, all Veblen goods are luxury goods, with the main difference being the intention behind purchasing them and the workings of the demand and supply model. Whenever you are unsure whether something qualifies as a Veblen good, ask yourself if it is being consumed to signal status and if an increase in the price of the good would lead to a greater increase in its demand. Typical examples of Veblen goods are luxury cars like Ferrari and Lamborghini, designer bags like Chanel, or high-end watches like Patek Philippe. Luxury goods which are not necessarily Veblen goods include gourmet foods (e.g., truffles or caviar) or high-end electronics (e.g., Apple products) which are luxury but are subject to usual price sensitivity; they don't necessarily become more desirable if their prices go up.
Let’s bring this to life further with a well-known example – that of a hand-wrought silver spoon – which Veblen introduced in The Theory of the Leisure Class:
A hand-wrought silver spoon, of a commercial value of some ten to twenty dollars, is not ordinarily more serviceable—in the first sense of the word—than a machine-made spoon of the same material. It may not even be more serviceable than a machine-made spoon of some “base” metal, such as aluminum, the value of which may be no more than some ten to twenty cents. […] The objection is of course ready to hand that, in taking this view of the matter, one of the chief uses, if not the chief use, of the costlier spoon is ignored; the hand-wrought spoon gratifies our taste, our sense of the beautiful, while that made by machinery out of the base metal has no useful office beyond a brute efficiency. (1899, [2017])
Indeed, a handcrafted silver spoon serves its purpose as well as any spoon crafted from different materials would, but as Veblen notes, the choice of silver flatware serves an additional purpose of showcasing one’s taste, appreciation for beauty, and higher social standing.
While the theory of Veblen goods has been a long-standing reality, its application in modern society has gradually evolved. In The Sum of Small Things, Elizabeth Currid-Halkett meticulously analyses these changes, providing data that shows a decline in conspicuous consumption and the Veblen effect, with fewer people now buying goods primarily to signal status:
Historically, they have always spent significantly more on conspicuous expenditures than inconspicuous consumption, and at the height of the financial crisis barely reduced their spending on clothes, watches, cars, and other Veblen goods. [...] The wealthy now spend almost 5.5 times more than the national average on inconspicuous goods (versus 2.5 times more than the nation on conspicuous consumption) and almost 12% more than they did in 1996. The middle class, by contrast, spends 40% less on inconspicuous consumption as compared to the US average, and 20% less as compared to 1996. (2017)
Elizabeth Currid-Halkett
Historically, they have always spent significantly more on conspicuous expenditures than inconspicuous consumption, and at the height of the financial crisis barely reduced their spending on clothes, watches, cars, and other Veblen goods. [...] The wealthy now spend almost 5.5 times more than the national average on inconspicuous goods (versus 2.5 times more than the nation on conspicuous consumption) and almost 12% more than they did in 1996. The middle class, by contrast, spends 40% less on inconspicuous consumption as compared to the US average, and 20% less as compared to 1996. (2017)
What is more, a new term has emerged that contradicts and reverses the Veblen effect, known as the Counter-Veblen Effect (Vidya Hattangadi, "The Veblen Effect," Financial Express, 2020). This concept suggests that it is increasingly common for people to take pride in their ability to find bargains for goods or services that are typically expensive. A great example would be that of a designer bag or clothing item. According to Veblen’s theory, the demand for a Chanel bag or Versace dress increases with its price as it signals status. Conversely, in Counter-Veblen theory, finding a Chanel bag or Versace dress at a significantly reduced price – for example, in a charity shop – would likely generate greater public admiration and envy.
Limitations of the concept of Veblen goods
Colin Campbell’s “Conspicuous Confusion? A Critique of Veblen's Theory of Conspicuous Consumption” (1995) highlights some of the most significant questions that may arise for readers encountering the notion of Veblen goods for the first time. The essay, for example, surfaces the fact that it is difficult to measure and judge the intentions behind good’s consumption, thereby making it difficult to distinguish between what is and isn't a Veblen good. As Veblen goods are consumed to showcase wealth and prestige, this can be subjective, with consumers rarely admitting this as the motive behind their purchases.
If we look at its more technical definition of Veblen goods, whereby demand for the good increases as its price increases, we encounter an additional blocker: There are other types of goods which follow this same property. This is the case for the so-called Giffen goods, i.e., non-luxury, basic products for which demand increases as their price increases because there are no ready substitutes or alternatives, forcing people to accept price increases such as bread, rice, and potatoes. This phenomenon was pointed out by English economist and statistician Robert Giffen, who found that during the period of rising prices in the 19th century in Ireland, impoverished people ended up consuming more potatoes, not fewer, contradicting typical economic expectations where an increase in price leads to a decrease in demand (2016). In Microeconomic Theory Walter Nicholson and Christopher Snyder state,
Legend has it that the English economist Robert Giffen observed this paradox in nineteenth-century Ireland: When the price of potatoes rose, people reportedly consumed more of them. This peculiar result can be explained by looking at the size of the income effect of a change in the price of potatoes. Potatoes were not only inferior goods but they also used up a large portion of the Irish people’s income. (2016)
Walter Nicholson and Christopher Snyder
Legend has it that the English economist Robert Giffen observed this paradox in nineteenth-century Ireland: When the price of potatoes rose, people reportedly consumed more of them. This peculiar result can be explained by looking at the size of the income effect of a change in the price of potatoes. Potatoes were not only inferior goods but they also used up a large portion of the Irish people’s income. (2016)
Overall, criticism of Veblen goods stems from the challenge of defining what qualifies as a Veblen good, whether that is due to the difficulty of measuring consumer intentions or because other goods share similar theoretical properties.
Closing thoughts
Veblen goods have intrigued economists because they challenge a fundamental economic principle: The law of demand. Despite the groundbreaking nature of this theory, it faces criticism regarding the difficulty of identifying such goods and measuring the intentions behind individuals’ purchases. Economic thinkers, such as Elizabeth Currid-Halkett and James Duesenberry, have studied the Veblen effect over time and observed its evolution, suggesting its presence might be subtler in modern times. This shift could reflect a broader societal trend where there is, in some instances, a certain stigma associated with openly displaying wealth. Instead, there seems to be a growing appreciation for values like quality of life and personal fulfillment over acquiring status and position through wealth.
Further reading on Perlego
The Production of Consumer Society: Cultural-Economic Principles of Distinction (2021) by Ernst Morh
Luxury Fever: Why Money Fails to Satisfy In An Era of Excess (2001) by Robert H. Frank
The Economy of Prestige (2009) by James F. English
What's Wrong with Benevolence: Happiness, Private Property, and the Limits of Enlightenment (2011) by David Stove, Andrew Irvine, and Andrew Irvine
What are Veblen goods in simple terms?
What are some examples of Veblen goods?
What is the difference between Veblen goods and Giffen goods?
What is the difference between Veblen goods and luxury goods?
Bibliography
Campbell, C. (1995) “Conspicuous Confusion? A Critique of Veblen’s Theory of Conspicuous Consumption”. Sociological Theory.
Currid-Halkett, E. (2017) The Sum of Small Things: A Theory of the Aspirational Class. Princeton University Press. Available at: https://www.perlego.com/book/739695
Gilady, L. (2018) The Price of Prestige: Conspicuous Consumption in International Relations. University of Chicago Press. Available at:
Hattangadi, V. (2020)"The Veblen Effect". Financial Express. Available at: https://www.financialexpress.com/opinion/the-veblen-effect/1906266/
Leibenstein, H., (1950) “Bandwagon, snob, and Veblen effects in the theory of consumers' demand.” The Quarterly Journal of Economics.
Nicholson, W. and Snyder, C. (2016) Microeconomic Theory: Basic Principles and Extensions Cengage Learning EMEA. Available at: https://www.perlego.com/book/2707119
Reeves, S. (2014) Microeconomics and Macroeconomics. Orange Apple. Available at: https://www.perlego.com/book/1239867
Schneider, G. (2019) Microeconomic Principles and Problems. Routledge. Available at: https://www.perlego.com/book/2193848.
Veblen, T. (2017) The Theory of the Leisure Class. Routledge. Available at:
https://www.perlego.com/book/1578663/the-theory-of-the-leisure-class
MA, Management Science (University College London)
Inés Luque has a Masters degree in Management Science from University College London. During high school, she developed a strong interest in Economics, leading her to win the national Economics prize in her country of nationality, Spain. Her expertise is in the areas of microeconomics, game theory and design of incentives. Inés is passionate about the publishing industry and is currently working in the consulting department of the Financial Times in London.