Veblen Good
What is Veblen Good?
A Veblen good is a luxury good whose demand increases as its price rises, because the high price signals status.
Unlike normal goods, a higher price makes Veblen goods more desirable as symbols of wealth or exclusivity (e.g., designer items). This conspicuous-consumption effect can produce an upward-sloping demand curve over some price range.
Veblen Good: a worked example
A design house sells 600 signature handbags a quarter at $240 each, so quarterly revenue is $144,000. It repositions the bag at $360 and sales rise to 750 a quarter, lifting revenue to $270,000. Quantity climbed 25 percent while price climbed 50 percent, so the two moved in the same direction, which is the Veblen pattern. Running the elasticity formula on those two points returns plus 0.5, and the positive sign is the tell that price was not the only thing to change, because the higher tag also changed what buyers read into the bag. Now set the price at $720. Sales fall to 300 and revenue slides to $216,000, so the status effect has an upper limit.
The mistake students make with veblen good
Bandwagon, snob, and Veblen effects get treated as one idea, because all three describe demand responding to other people. They respond to different things. Bandwagon demand rises because others are buying, so it tracks quantity. Snob demand falls as the crowd piles in, so it tracks exclusivity. Veblen demand rises because the price itself is visible and carries the status message, so it tracks price. The quick test is whether the buyer would still want the item if the price tag were kept secret. If the answer is yes, something other than a Veblen effect is at work.
Veblen Good questions
What is the difference between a Veblen good and a luxury good?
A luxury good is defined by income: quantity demanded rises more than proportionally when income rises, giving an income elasticity above one, and the demand curve still slopes down. A Veblen good is defined by price: raising the price raises quantity demanded, because the price tag is part of what buyers are purchasing. Most luxuries are ordinary downward sloping goods, and only a narrow set behave the Veblen way.
Does a Veblen good break the law of demand?
The law of demand assumes everything except price is held constant, including how buyers judge quality and status. With a Veblen good the price is itself information, so raising it changes the good buyers think they are getting and shifts the demand curve to the right. What looks like an upward sloping curve is really a sequence of shifted curves. Under the strict other things equal reading, the law survives.
What are examples of Veblen goods?
Designer handbags, limited edition watches, premium spirits, and exclusive club memberships are the standard textbook cases. Each shares one feature: buyers cannot easily verify quality, so the price tag doubles as a visible marker of what the owner can afford. Cutting the price of such an item can reduce sales by making it look ordinary, which is why sellers of these goods rarely discount them openly.
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