Veblen goods

Veblen goods, named after Thorstein Veblen, are products bought not because they increase an individual’s well-being, but because they signal wealth and status.

Veblen goods include items such as Rolex watches, Gucci suits, etc. They might have better quality than ordinary products, but not enough to justify the huge price difference. Their primary purpose is to exclude those who cannot afford them from those who can.

Veblen goods defy the laws of demand such that the more expensive they become, the more they attract buyers. This is because, the more expensive they become, the more those who can afford them separate themselves from the crowd. In simple terms, people buy Veblen goods because others cannot afford them.

Take a Chanel bag, for instance. Suppose they usually cost around $20,000. Then, suppose a new model drops today, priced at $50,000. A rich woman who has never had any interest in Chanel bags suddenly becomes interested in buying the new model. Why? Because if she buys that bag, it clearly shows her level. It separates her from other women who can only afford the older, cheaper models.

Another interesting thing about Veblen goods is that people lose interest in them if they become cheaper. To stay relevant and in demand, their prices must keep rising.