Veblen Theory Conspicuous Consumption

The Veblen effect (where goods are desired for being over-priced) and when consumers prefer to buy more expensive items because they think that goods with a higher price tag are more exclusive and thus indicate status. We will be covering conspicuous consumption and theories surrounding such theories over the next few months in a special microeconomics series. 

The Veblen effect is one of a family of theoretically possible anomalies in the general law of demand in microeconomics. Other related effects include:

  • The snob effect: expressed preference for goods because they are different from those commonly preferred; in other words, for consumers who want to use exclusive products, price is quality.
  • The bandwagon effect: preference for a good increases as the number of people buying them increases (a psychological effect).
  • The network effect: value of a good increases as the number of buyers or users increases (e.g., as the number of people with telephones or Facebook increased, the value of having a telephone or being on Facebook increased since the user could reach more people).
  • The common law of business balance: low price of a good indicates that the producer may have compromised quality, that is, "you get what you pay for".
  • The Hot-hand fallacy: stock buyers have been observed to fall prey to the hot-hand fallacy, preferring to buy more successful stocks and sell those that are less successful.

Some of these effects are discussed in a classic article by Leibenstein (1950).The concept of the counter-Veblen effect is less well known, although it logically completes the family.

Thorstein Veblen (Wiki)