Veblen Goods are a group of goods that do not follow the law of demand, which states that there exists an inverse relationship between the price of a good or service and the quantity demanded of that good or service. Veblen goods violate the law of demand but only after the prices have risen above a certain level.
The Veblen Effect has a positive impact of the price of a commodity on the quantity demanded of that commodity. The Veblen Effect is named after The American economist and sociologist Thorstein Veblen, who studied the phenomenon of conspicuous in the late 19th century.
Let us consider the demand curve which is shown above. As the price of the commodity increases from P-A to P-B, the quantity demanded of the commodity decreases from A to B. As the price of the commodity increases from P-B to P-C, the quantity demanded of the commodity decreases from B to C. In between the prices P-A and P-C, the law of demand remains and there exists an inverse relationship between the price of a commodity and demand for that commodity.
Nevertheless, for prices beyond P-C, the Veblen Effect influences the law of demand. As the price increases from P-C to P-D, demand increases from C to D. For all the prices above, P-C, the law of demand does not hold, and there still remains a positive relationship between the price of a commodity and demand for that commodity.
Reasons For The Veblen Effect :
Perception Of Quality - On studying Veblen’s analysis of conspicuous consumption, we understand that Veblen noted that for certain luxury goods and services, a higher price was usually associated with the perception of higher quality. Hence, a price increase was seen as evidence of the producer improving quality.
Positional Goods - Veblen goods often are positional goods. The quantity demanded of a positional good depends on how the goods are distributed in society. Veblen goods often reveal a negative positional effect, i.e., the quantity demanded of a Veblen good rises with a decrease in the distribution of the good. It occurs because the utility gained by a consumer from holding such a good arises from the fact that some other consumers hold it.
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