The law of demand says states that demand for a product will decrease as the price increases – the more it costs, the lower the demand. Demand for Veblen goods is very different – higher prices increase demand.Veblen goods exhibit reverse elasticity of demand.
Veblen goods are most commonly luxury items where high prices add a sense of exclusivity and prestige. Lower prices make the item more widely available, less exclusive and less prestigious – diminishing what was most desirable about the item.
There are a number of other factors that come into play with Veblen goods…
Price Sends a Powerful Message About Quality
Price sends a powerful signal about quality. Whatever the marketing materials or reviews say people strongly associate high price with high quality, and with that comes demand. Manufacturers will sometimes compete for the prestige of being the most expensive. Over the past decade many urban centres saw upscale restaurants compete to offer the most expensive hamburger. The high prices increased demand as people were eager to experience what is was that made the burger so special, but the only really special thing was the price.
High Prices Guarantee Exclusivity
High prices guarantee exclusivity because relatively few people can afford them. Also known as the snob effect this increases the demand for expensive goods among consumers that desire exclusivity. Lower prices diminish exclusivity and demand.
(Perceived) Higher Priced Products Really Are Enjoyed More
People don’t just think higher priced goods are better, they can actually experience them as being better. A fascinating study that used an MRI machine to study brain activity clearly showed that the brain really did enjoy (based on measurements of electrical activity) wine more when it was believed to be expensive.