It occurs where people buy more expensive goods when there are cheaper alternatives available.
Veblen goods are those which are particularly subject to the Veblen Effect. Any luxury-goods market is likely to have a significant number of Veblen goods.
Example
A man buys a larger car than he needs because he believes his friends will be impressed.
A woman buys designer clothes because she feels others will think she is of a higher social class.
Discussion
In social desirability bias, people act in ways that will maximize the esteem they believe they will get from others. This can make spending more on goods a rational decision when the value gained is understood as a combination of both product functionality and social status. This appears in 'conspicuous consumption' where an important reason why people buy goods is in order to look good. In such situations, it becomes necessary to display purchased goods in social settings, and hence focus on buying goods that can be used in this context (for example buying expensive clothes or cars).
The Veblen effect is related to the price-quality heuristic, where there is an assumption that more expensive items are somehow superior. In particular there can be an assumption that the superiority of the product reflects on the person buying it, making them somehow superior also.
There is also a 'Counter-Veblen Effect', where people believe they will be admired for buying bargains or for being prudent in their purchases. This can be seen where people boast about how little they paid for a normally expensive item. It can also be a motivator for buying in sales and low-cost outlets.
The Veblen effect is named after American economist Thorstein Veblen, who wrote about the way people seek status through spending at the end of the nineteenth century, and who first named this as 'conspicuous consumption'.
The Veblen effect is potentially applicable when a good or service is plainly
visible to others, strongly associated with status or affluence, distinguishable from competitors and knockoffs, and priced high relative to competitors. For example, many universities have learned the hard way that parents and students equate the quality of education with the price of tuition. To increase enrollment and address complaints about the rising costs of education, many boards of trustees reduce tuition.
This, however, invariably results in a decrease, not an increase, in student enrollment. Reducing the price of tuition decreases both the perceived quality of the education offered by the school and the prestige of the school itself, which correspondingly decreases demand. Conversely, when universities increase the price of tuition, student enrollment increases.
However, this increase creates a perception problem of price gouging and a practical problem of affordability. The solution adopted by many schools is to simultaneously increase the price of tuition and the availability of hardship discounts and financial aid. This permits
an institution to increase enrollment, increase its patina of quality and prestige, and appear benevolent by offering increased student discounts and assistance.2 Note that tactics such as these must be employed carefully as overly abundant discounting or assistance programs will undermine the effect.
Consider the Veblen effect in marketing and pricing when the basic conditions for its application are satisfied. To leverage the effect, promote associations with high- status people (e.g., celebrities). Ensure that form factor and branding clearly and memorably distinguish products from competitors. Employ strategies to discourage knockoffs, including legal protection (e.g., trademarks and patents), watermarking, and aggressive counter advertising. Set pricing high based on the intangible aspects of the offering versus its marginal cost.
The Veblen effect comes from the desire to obtain social status by purchasing luxury products as it displays wealth. Consumers tend to purchase luxury products for what they perceive as having superior quality and for self-directed pleasure (Truong and Rod, 2011). Consumers purchase luxury products because by having an item others don’t, it shows their wealth and social status. Along the same line, items of much cheaper price is perceived as being lower quality as anyone is able to obtain this item, these items can lower your social status.
Here’s an example, there are three brands of chocolate that is available for gifting, Coles, Cadbury and Ferrero Rocher, if someone gifts Ferrero Rocher a luxury item, it gives them social status as it makes them seem richer, however if you give someone Coles brand it would make you lose social status as it makes you seem poor. Who would want to purchase an item that makes you lose status.
The Veblen effect is based on the idea that “people act in ways that will maximize the esteem they believe they will get from others” (Veblen effect, 2017), this creates a justification for purchasing expensive goods when what they gain from it is social recognition, the video below shows an example, where people enjoyed the wine that was more expensive.
In today’s context, the Veblen effect is often a marketing strategy of a firm, where they aim to have their products represent and give social status (Pepall & Reiff, 2016, p. 219). In today’s society, many organisations sell technology with the same function, and what differentiates one from another is the marketing strategy rather than the function. For example, all bikes are made to roll on two wheels, however one bike can be expensive and show wealth, while another bike can show poverty.
So comparing a Rolex to a common watch, what makes one better than another, the aesthetics, the functionality, or the brand perception?
What if i told you that the Rolex watch on the left is only $5 and the watch on the right is $5000, would it change the way you think about the product, or do you automatically assume that the Rolex is already superior.
What if Rolex decided to change, and set up so that all Rolex watches were $5 each, what would you think if someone walked around with one?