One of my school batchmates, Aranjit, posted a story on the Veblen Effect in our WhatsApp group today and today’s my off-day, so thought of blogging on it.
Veblen effect is an abnormal market behavior where consumers purchase the higher-priced goods whereas similar low-priced (but not identical) substitutes are available. It is caused either by the belief that higher price means higher quality, or by the desire for conspicuous consumption (to be seen as buying an expensive, prestige item). Named after its discoverer, the US social-critic Thorstein Bunde Veblen (1857-1929).
The law of demand states that higher the price, lower will be the demand for any commodity, and vice versa. When the price of onions went up from ₹30 to ₹200.00 per kg, the demand for it fell. Many hotels stopped including onions in salad; others took the onion uthappam off their menu. This reaction by consumers was normal, as explained by the law of demand. The Veblen effect is, however, one exception to the law of demand. A Veblen good is a good for which demand increases as the price increases, because of its exclusive nature and appeal as a status symbol. It means spending of money on luxury goods and services to display financial power, and for them, price is quality.
In the 19th century, the term conspicuous consumption introduced by Veblen in his book “The theory of leisure class: An economic study in the evolution of institutions.” Conspicuous consumptions occur by men, women, and families of the upper class who show off their great wealth as a means to manifest their social power and prestige either real or seeming. Veblen wanted to site the relationship between the economy, society, and culture.
Story of Julius Caesar
In the 1st century BCE the Mediterranean Sea had a crime problem. Specifically, it had a pirate problem. The rugged region of southern Anatolia known as Cilicia Trachea (Rough Cilicia) was notoriously infested with seagoing bandits whose depredations terrified Romans. In 75 BCE a band of Cilician pirates in the Aegean Sea captured a 25-year-old Roman nobleman named Julius Caesar, who had been on his way to study oratory in Rhodes. I am narrating this story from Britannica.
From the start, Caesar simply refused to behave like a captive. When the pirates told him that they had set his ransom at the sum of 20 talents (approx. 620 kg of silver), he laughed at them for not knowing who it was they had captured and suggested that 50 talents (1550 kg of silver) would be a more appropriate amount. He then sent his entourage out to gather the money and settled in for a period of captivity. The pirates must have been dumbfounded. It’s not every day that a hostage negotiates his ransom up.
Caesar made himself at home among the pirates, bossing them around and shushing them when he wanted to sleep. He made them listen to the speeches and poems that he was composing in his unanticipated downtime and berated them as illiterates if they weren’t sufficiently impressed. He would participate in the pirates’ games and exercises, but he always addressed them as if he were the commander and they were his subordinates. From time to time he would threaten to have them all crucified. They took it as a joke from their overconfident, slightly nutty captive.
It wasn’t a joke. After 38 days, the ransom was delivered and Caesar went free. Astonishingly, Caesar managed to raise a naval force in Miletus—despite holding no public or military office—and he set out in pursuit of the pirates. He found them still camped at the island where he had been held, and he brought them back as his captives. When the governor of Asia seemed to vacillate about punishing them, Caesar went to the prison where they were being held and had them all crucified.
Caesar took back his 50 talents of silver, along with all their possessions. Thus, in 75 BCE Caser created a Veblen effect—conspicuousness is in existence since ages.
6 thoughts on “The Veblen Effect”
Hahaha! Well, I don’t spend money on iPhone or high-end Samsung phones. I always prefer mid-priced mobiles, which performs whatever I want. So, I am not under the influence of Veblen Effect. Nice Post.
Thanks, Nilanjana. You’re smart. 😉
It is also called a marketing maneuver in other words the perceived value of the product/ brand is disproportionately higher than the cost+ mechanism of pricing. A classic example is our simple Tea… you can buy it as low as ₹1 a cup at a roadside stall and also pay ₹200 + taxes at a 5star restaurant.
In today’s Times of India, there’s an ad of Titan Edge wristwatch…the USP of the brand (Edge) is that it is perhaps the thinnest (2mm approx) watch… I have two of them and was curious if the new offering… I remember the ones I have do not cost more than 5K, therefore, was taken aback at the price of ₹1.85 Lac quoted (for the limited edition!!)…
Will you call this Veblen effect??? 😊
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Veblen effect is a relative term. So long, there is a willing buyer to buy at the quoted price, the price demanded by seller is justified. After all, the seller has also put in something to create the Veblen effect. 🙂
Yes, read about it earlier. However, the story of Ceasar was not known, until it was narrated by Aro, which is elaborated further by you. Nice post. Cannot afford Veblen effect affect me…haha…
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Hahahaha, thanks, Mano.