The Veblen effect perfectly characterizes the policy of many marketing campaigns. By studying consumer psychology, manufacturers of expensive and branded goods assure potential customers that it is their product that has unique qualities that can enhance the status of the owner.
What is the Veblen effect?
The Veblen effect is named after Thorstein Bunde Veblen, an American economist, and sociologist who studied the phenomenon of demonstrative consumption in the late 19th century. Mr. Veblen was known as a witty critic of capitalism who condemned production for profit and had a great influence on socialist thinkers.
Usually, the higher the price of a particular item, the fewer people will want it. However, there are exceptions for luxury goods, such as very expensive wines, watches, or cars. Such items become more desirable as they become more expensive, and conversely, less desirable if they suddenly drop in price.”
The basis of the Veblen effect is an increase in demand for luxury goods with an increase in their prices. As a rule, such purchases lack rationality. Buyers purchase goods not because of their convenience or usefulness, but because of the high price tag. This demand is called indicative demand. Reducing the price of the goods, on the contrary, causes the consumer psychological discomfort associated with the feeling of low-quality or fake work.
Ordinary goods are goods for which demand increases with income. However, demand for luxury goods grows much faster.
Low-quality goods (services) are goods for which demand falls as income increases. An example of a low-quality service is public transportation, the demand for which falls as people’s earnings increase. As soon as people start earning more money, they stop using public transportation and buy cars.
Products that people buy to enhance their socioeconomic status, impress others and make others think they have money, taste, class, and style are called positional goods.
Such behavior is peculiar to a small percentage of consumers, who nevertheless have a high purchasing power. This knowledge is actively used by marketers and PR managers of famous companies. It is for this segment of consumers that such concepts as “economy”, “standard”, “business”, “premium”, “luxury”, “VIP”, etc. were introduced.
Examples of Veblen products
- designer items (shoes, clothing, accessories);
- works of art;
- real estate;
- precious stones;
- collectible wines;
- expensive machinery;
Another no less striking example of Veblen products is the famous Apple brand.
Most often users choose it, guided by the loud name of the brand and believing that the possession of this technology will raise their status in society.
The Veblen effect is also often seen in pharmaceuticals, when choosing between two identical products from different manufacturers, the buyer leans in favor of the expensive one, believing that it will be of higher quality and more effective.
Reasons for the Veblen effect
The Veblen effect tends to affect people who need to buy expensive things to demonstrate their income, wealth, and even superiority. Social psychologists note that this behavior is especially characteristic of the following categories:
- People who are in transition from one income level to another, higher income level.
- Young guys and girls whose self-esteem often depends on their environment and income level.
- Collectors for whom the value of purchased goods is subjective.
- Insiders, whose behavior is often determined by the behavior of a group of people they respect.
Veblen goods are often positional goods. The amount of demand for positional goods depends on how they are distributed in society. They exhibit a negative positional effect, i.e., demand for them increases as the distribution of the goods decreases. This is because the benefit the consumer receives from holding it arises solely because few people own it.
The Veblen effect is widespread almost everywhere except in the Third World (because of the large percentage of the population that is poor). Social economists note that it manifests itself differently in the countries of the former Soviet Union and the highly developed countries of Europe. Residents of European countries prefer brands with a long history and a well-deserved reputation, while for citizens of post-Soviet states, price is the main choice.