Question

If Veblen is correct and conspicuous consumption exists, then what role does price have in determining marginal utility?

Answer 1

What is a Veblen Good?

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. A Veblen good has an upward-sloping demand curve, which runs counter to the typical downward-sloping curve. However, a Veblen good is generally a high-quality, coveted product, in contrast to a Giffen good, which is an inferior product that does not have easily available substitutes.

Veblen goods are fairly commonplace, unlike Giffen goods which are elusive and quite difficult to identify. Very expensive products – such as designer jewellery, pricey watches, and luxury cars – that are marketed as being “exclusive,” or which convey the appearance of success, can be classified as Veblen goods. Veblen goods are generally targeted at affluent individuals, have a very strong brand identity that is synonymous with luxury and are far more likely to be sold in upscale boutiques than in common department stores.

Conclusion

We examine conditions under which "Veblen effects" arise from the desire to achieve social status by signalling wealth through conspicuous consumption. While Veblen effects cannot ordinarily arise when preferences satisfy a "single-crossing property," they may emerge when this property fails. In that case, "budget" brands are priced at marginal cost, while "luxury" brands, though not intrinsically superior, are sold at higher prices to consumers seeking to advertise wealth. Luxury brands earn strictly positive profits under conditions that would, with standard formulations of preferences, yield marginal-cost pricing.