Veblen Effect
What is the Veblen Effect?
The Veblen Effect, named for famous United States’ social critic Thorstein Bunde Veblen, refers to economic situations in which consumers purchase higher priced goods when suitable and substantially cheaper alternative options are available. Thus, the Veblen Effect can be seen as an exception to the economic law of demand in that the demand for some goods can be driven by their prices instead of their supplies. Said simply, the level of demand for a given good may increase simply because the price of that good has increased. In this situation, price is directly and equivalently related to quality.
What causes the Veblen Effect?
The driving force behind the Veblen Effect is the pursuit of status among the leisure class. People desire to distinguish themselves through the material goods that they possess and accordingly higher priced goods symbolize higher status regardless of their quality relative to cheaper goods. This drives the prices of certain products upward so that businesses can distinguish their products from others based on price instead of quality.
What is the Counter Veblen Effect?
The Counter Veblen Effect describes a market situation in which the demand for a certain good continues to increase considerably while its price drops. The Counter Veblen Effect refers to instances in which the corresponding drops in price and increases in demand continue well beyond what supply and demand theory would predict.