The Economics of Social Status: Why We Pay More for Less
Typically, consumers pay more money to get a greater quantity of a good. The per-unit price may drop due to the principle of economies of scale, often known to consumers as buying in bulk, but the total cost rises as the number of units in the good - milliliters, ounces, square centimeters, etc. - increase. Basically, the more you buy, the more you have to spend. However, there is a key area of exception to this rule: Veblen goods. American economist Thorstein Veblen created the concept when describing conspicuous consumption.
What are Veblen Goods?
Veblen goods are luxury goods that specifically denote wealth. Typically, these are expensive brands that are popularized by the media, ranging from automakers like Ferrari and Porsche to clothing designers like Gucci and Prada. As soon as the brand is seen, observers know that the product is expensive…and that the possessor of the product is likely wealthy. Almost always, these Veblen goods are the very top of a pyramid of suitable substitutes, meaning there are lower-cost options serving the same purpose that are accessed by non-wealthy consumers. For example, there are many automobile substitutes for a Lamborghini that sit lower on a “hierarchy” of cost and desirability. Similarly, there are a myriad of clothing manufacturers that sit below Gucci, going all the way to store-brand clothing seen in Walmart.
Violating the Law of Demand
These luxury goods sitting atop pyramids of suitable substitutes famously violate the Law of Demand, which states that consumers will buy greater quantities of a good when prices are lower. Research has found that Veblen goods actually increase in popularity, meaning greater quantity demanded, when prices are higher. Consumers buy Veblen goods as part of conspicuous consumption, meaning they want observers to assume that the consumers are wealthy and tasteful. Thus, a luxury good has to be widely known as very expensive in order for it to be a true Veblen good.
Why do People Buy Veblen Goods?
At first glance, Veblen goods make little sense: why spend large amounts of money just so that others know (or assume) that you are wealthy? Luxury goods by designer brands, sporting conspicuous logos, are not just purchased by the wealthy. Controversially, many middle- or lower-income people are criticized for buying designer brands, with observers opining that they should purchase lower-cost substitutes to save their money for investments and/or durable goods. While it is true that a pair of Walmart work boots may last longer and be better on the job site than a pair of deluxe Nikes, the symbolism of being able to wear fashionable Nikes to work has real value.
It’s the Image, Not Necessarily the Quality
Some Veblen goods are very high quality, but rarely rival the next several tiers down the substitute pyramid in terms of practicality. A Lamborghini Urus sport utility vehicle, for example, is easily rivaled in terms of practicality by much less expensive SUVs like the Ford Explorer or Jeep Grand Cherokee. But being seen driving a Lamborghini Urus may have real value for striving white collar executives. Observers may assume that those who possess Veblen goods have talent, skill, and work ethic commensurate with those goods, thus making those individuals more desirable as units of labor.
A common adage says “dress for the job you want, not the job you have.” While this does not directly reference Veblen or luxury goods, the rationale is similar in that showing quality and confidence is likely to pay off by impressing one’s potential employers and/or clients. Those looking to pay for someone’s labor look for signs that this labor will be of high quality, and professional dress and transportation are definite signs. If a company is hiring a new CEO, an applicant who is seen driving a luxury SUV and wearing a designer suit is more likely to be assumed as highly competent.
Thus, spending thousands of extra dollars on Veblen goods instead of traditional goods can pay off in terms of achieving higher income, especially in areas where worker resumes are similar. A famous example comes from higher education in the United States, where college tuition has controversially soared over the last few decades. Stephen Joel Trachtenberg, president of George Washington University from 1988 to 2007, opined that college education was like vodka - which included Veblen good brands like Absolut. Although vodka was essentially the same (a standardized good), people wanted to be seen buying bottles of luxury brand vodka. Trachtenberg set out to make GWU more expensive through luxury projects, and his plan worked. By the end of his tenure, the university attracted many more applicants…including wealthier applicants.
Social Media and Conspicuous Consumption
The rise of social media has significantly benefited manufacturers of Veblen goods, as lower-income consumers now have increased chances of signaling wealth and social status to providers of income. Previous generations had to display their Veblen goods in person, but today’s consumers can spread those images digitally. Across the globe, consumers are buying more luxury goods to display wealth and status online. This is especially true of those seeking to be influencers or entertainers, knowing that fans look up to content creators who appear wealthy and successful. Rap and hip hop music frequently feature artists referencing Veblen goods, with those brands denoting their wealth and success.
Economics of Veblen Good Consumption
Critics of conspicuous consumption frequently argue that it is wasteful and psychologically harmful. However, research has found that there are some self esteem benefits of purchasing Veblen goods, with individuals suffering low self esteem purchasing more luxury goods as a way to see themselves - and signal to others - increased social desirability. Thus, even though Veblen goods are more expensive and may provide less quality-per-dollar than conventional goods, they may be worth it by providing greater utility (satisfaction).
Similarly, many consumers see Veblen goods as a reward, meaning they provide greater utility. In this regard, some purchases of luxury goods may be beneficial psychologically. Constant deprivation from a desired good or service in order to be frugal may cause psychological harm in the long run, necessitating greater expenses later in terms of therapeutic treatments. A balance is necessary, requiring active budgeting, to prevent the purchase of Veblen goods as a reward from becoming overspending, resulting in anxiety. Therefore, only consumers who actively budget and are deliberate about their spending should consider luxury goods as rewards for achievements.
Veblen Goods as Investments
Some consumers may deliberately purchase Veblen goods as investment vehicles instead of just conspicuous consumption. Luxury durable goods like gold watches and jewelry may increase in value in a reasonable time frame, or at least hold most of it (providing a store of value). Classic cars are another popular Veblen good investment, as are luxury homes in desirable locations. To serve as an investment, however, use of these Veblen goods must be cautious to avoid reducing their appearance or functionality. Aside from super rare classic cars, for example, collectors only want to pay top dollar for models in near mint condition.
A savvy consumer, therefore, should not purchase a classic Ford Mustang to use as his or her daily driver automobile and increase the risk of damaging it during routine commutes. The use of Veblen goods as investments can reduce their value as conspicuous consumption; owners cannot widely display them without risking loss of value. As a result, it takes conscious planning to make a savvy investment in a luxury good as opposed to traditional investments like stocks and bonds. Investors need to have a reasonable belief that the luxury good will remain popular and attractive over a long time horizon in order to increase its value.