What They Are
A Veblen good is a product for which demand increases as the price rises - the opposite of normal behavior. They are named after the economist Thorstein Veblen, who described them in The Theory of the Leisure Class (1899).
Unlike normal goods, where higher prices drive customers away, Veblen goods attract customers because of the high price. The price itself is part of the product’s value. It signals status, exclusivity, or taste.
Classic examples: luxury watches (Rolex, Patek Philippe), high-end handbags (Hermès, Chanel), supercars (Ferrari, Lamborghini), first-class airline seats, and bottles of wine that cost more than a month’s rent.
Why the Price Matters
A Veblen good does two things at once. It provides the functional product (telling time, carrying items, getting from A to B) and it provides a social signal - I can afford this; I belong to a group that appreciates quality; I am not price-sensitive.
Lower the price, and the signal weakens. A Rolex that cost $200 would not say what its owner wants it to say. The customer who buys a Veblen good is not looking for a bargain. They are looking for something that is not a bargain. This is why luxury brands rarely discount and sometimes deliberately raise prices.
How It Differs from Giffen Goods
Both Giffen and Veblen goods have upward-sloping demand curves (higher price → higher quantity demanded), but the mechanism is entirely different:
| Giffen Good | Veblen Good | |
|---|---|---|
| Who buys it | The poorest households | The wealthiest consumers |
| Why demand rises | The price increase makes them poorer, forcing them to buy more of the staple | The high price signals status and exclusivity |
| Example | Potatoes during a famine | A $10,000 handbag |
| Driven by | Desperation | Conspicuous consumption |
A Giffen good is bought despite the high price. A Veblen good is bought because of it.
Why It Matters
Veblen goods are a reminder that consumers do not always behave like the rational maximizers of introductory textbooks. People buy for many reasons - identity, status, belonging, signalling - and price plays different roles in different purchases.
This matters for policy and business. A tax on luxury goods may not reduce consumption as much as a simple demand model predicts, because the higher after-tax price may increase the signalling value. A luxury brand that cuts prices to attract more customers may actually lose its core customers.
Common Misunderstandings
Not the same as a “snob effect.” The snob effect describes consumers who avoid a good as it becomes more popular (they want to be different). A Veblen good attracts buyers because of its exclusivity, which is related but distinct.
Veblen goods are not irrational. The buyer is getting real utility from the social signal the price provides. It only looks irrational if you ignore that signal.
See also: Giffen Goods, Supply & Demand, Prices