“Hello, Wisconsin!” An infant yells as he bursts from the womb in the early morning of July 30 1857. Born into this world ready to shake up social and psychological economics for good. Baby Thorstein Veblen knew little of the impact he would have on the modern luxury landscape.
That first sentence will only be funny for readers who grew up in the 90s watching the popular sitcom ‘That 70’s Show’. That’s my poor effort to make readers of an article about economic theory sound exciting.
I was listening to a podcast recently called Acquired that was all about the history and business strategy of Hermes. About 2 hours in (it’s a long podcast and yes I’m fun at parties) I heard something very interesting. The hosts, Ben Gilbert and David Rosenthal were talking about how Hermes, and luxury brands in general use their pricing to manipulate how consumers perceive them. I thought I understood this process pretty well. Put prices up - Some people are priced out, but some will just spend more willingly. More money made overall.
Sounds a bit like what the Australian supermarkets do to make more money on avocados, those bastards!
What Is A Veblen Good?
In its simplest definition. A Veblen good is a product, usually a luxury item (or avocado) for which demand increases as the price does. Sounds simple enough, but there's something interesting going on. The price of a Veblen good has a direct effect on its desirability in the market. Higher price - more desirable, Lower price - less desirable. Logically this doesn't make sense, wouldn't you want to buy something better, for less? We'll talk about some examples of Veblen goods later on but for now, you're just going to have to trust me, this stuff is wacky.
The veblen good phenomenon was named after the American Economist Thorstein Veblen (Baby Veblen from the first paragraph). He first penned his observations of conspicuous consumption in the book 'The Theory of The Leasure Class', after witnessing the status-seeking behaviours of the wealthy in the late 19th century. I can just imagine Mr Jones from the fancy part of town paying double for a taller horse just so he can ride around above everyone else. He definitely wasn’t compensating for anything….
Consumption as a way of indicating status has to be one of the most nauseating traits of human beings. Why are we like this?
Veblen's ability to test his theory was slightly flawed however, because of the lack of honesty from his subjects - Mr Jones pretending he didn’t pay double for his horse for example. There have been many studies since that support his theory, so Mr Veblen has been proven right.
One may argue that an increase in price is caused by the increase in demand and not the other way around. I understand this argument, and we may never know if the chicken or the egg came first but I would argue that it’s not that simple. Companies want to manipulate how you feel about a product, and the price is one of many levers they can pull to change how you feel about them. It’s the egg, before the chicken for me.
Veblen Goods And The Perception Of Quality
Imagine you’re at the supermarket, and you want to buy some coffee. Two options present themselves on the shelf - One of them is $10 for a bag of the brown stuff, and the other is $15. Similar packaging designs, similar quantity, right next to each other. Which one do you instinctively feel is the better coffee? Chances are you will think it’s the $15 bag.
But why? There’s no other visual indication of the quality of the beans inside, it's just the price. Our brains have been wired to correlate price with quality over decades of conditioning by marketing companies.
The amazing part is, if presented with a cup made from both bags, most of us would still choose the expensive one no matter the reality. Our brains place so much importance on perceived quality that it physically changes our taste preferences because of it. We subconsciously justify the price and ‘enjoy’ the product more even if it’s fundamentally the same, or even worse. We’re a weird bunch.
Luxury companies use this to increase the perception of the quality of their products.
To be fair, Veblen goods are often of higher quality than their cheaper counterparts. But there’s a limit to this, you may get diminishing returns the more expensive a product gets.
Pricing Out The Rif-Raf
We all like to have things other people don’t. I’m sitting in a business class flight right now and I get a warm fuzzy feeling that most of the other people don’t have as much legroom as I do. Is that a bit fucked up? Yes, but it’s true.
Higher pricing puts Veblen goods out of reach for most people. A $15,000 Rolex isn’t accessible to the average Joe, and that’s the point. If I want to tell people around me that I’m more successful than them, I wear something that most people can’t afford. Like a peacock with a gold feather in its tail instead of a blue one. He’s not like all the other, less successful Peacocks, strutting around trying to attract all the peafowls. An expensive watch isn't about telling the time, it's about telling people how valuable your time is.
Price As A Bragging Right.
In my mind, this could go either way. If you buy something expensive instead of something comparable, but less expensive, you’re signalling to everyone around you that you can. But in Australia in particular, where tall poppy syndrome is rife you may just be seen as an idiot. Value is subjective. A $700 watch may be an insane amount of money to spend for some, but on the other hand, some might feel embarrassed to be seen wearing a watch worth under $10,000.
Examples Of Veblen Goods In The Watch Industry
I can’t think of a product that leans into the ‘Veblen effect’ more than watches. It’s a largely status-driven industry and Rolex being one of the most recognisable brands in the world, it's products are perfect examples of a Veblen good.
When I was working in a Rolex authorised dealer, I experienced more than seven price increases on high-demand Rolex models in a space of two years. And surprise surprise, not once did I see a decrease in demand or enquiries for them. Whenever I told my clients the price they just smiled and handed over their Amex cards, even if the number I told them was 10% more than what it was when they enquired about it six months earlier.This is the power of a Veblen good.
Continuing with Rolex as an example, their frequent increase in pricing does something else to our brains which I’m sure is well thought out by their marketing department. When you see so many increases, you know that in a few months, your desired watch will be more expensive. This does two things:
- You want to get it faster, you desire it more and you get anxious that you will have to pay more for it in the future. This drives demand in the short term.
- You know that when you eventually do get that watch you’ve been lusting after, it will be worth more than what you paid for it. And I’m not just talking about the resale market. The replacement cost of your watch at retail will be higher too. You're not loosing money.
These in-demand brands have us in a headlock.
The Amex Centurion is another example of a Veblen good. A High barrier to entry and the visible status that the black metal card brings are all part of the offer. If it was easy or cheap to get one, no one would want it. The Hermes Birkin and Kelly bags are products of beautiful quality, but I can guarantee that's not why 95% of people want one. It’s all about being seen, and when you are, people will know how much money you spent on tablecloths and coasters to get it. The Hermes Birkin is an interesting one because the social value of the products goes beyond the price of the bag, it’s also in the 100k you spent on other products to get it.
Are Veblen Goods Ethical?
Probably not.
Beyond the companies knowingly taking advantage of the Veblen effect to extract more profit from their customers, there’s also the issue of social comparison. There exists an inverse relationship between one's well-being and another’s income. “The more visually wealthy my mate on Instagram looks, the worse I feel about myself.”
It’s all a visible manifestation of the widening wealth gap.
I want to separate ‘visually wealthy’ from actually wealthy here. They aren’t the same thing.
Is There A Justification For Veblen Goods?
Just as long as we’re not buying Veblen goods to keep up with Mr Jones and his tall horse.
I do think you need to be clear about your reasoning when consuming this stuff. I’m probably going to keep buying watches for the rest of my life and I hope to buy some that are priced way above their material values. But I want to be conscious of my choices. Along with the best of us I get caught up in the hype of the latest Rolex or Patek Philippe. But after learning about the Thorstein Veblen and his observations I’ve started to question my desires.
At the end of the day, we just need to ask ourselves why we want what we want.
Why we are buying that bag, or that watch? Is it because we love it and it makes our lives more enjoyable? If the answer is yes, then go for it.
That’s all the justification you need.
If the answer is no, then maybe Veblen goods should be avoided. Sorry Mr Jones.
Cya in the next one x
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