Veblen Effects in a Theory of Conspicuous Consumption

TLDR

While Veblen effects cannot ordinarily arise when preferences satisfy a single‑crossing property, they may emerge when this property fails. The authors examine conditions under which Veblen effects arise from status signaling through conspicuous consumption and explore factors that induce them while investigating policy implications. They analyze the factors that induce Veblen effects and assess policy implications. Budget brands are priced at marginal cost while luxury brands, though not intrinsically superior, are sold at higher prices to advertise wealth, and luxury brands earn strictly positive profits even under conditions that would normally yield marginal‑cost pricing. Copyright 1996 by American Economic Association.

Abstract

The authors examine conditions under which 'Veblen effects' arise from the desire to achieve social status by signaling wealth through conspicuous consumption. While Veblen effects cannot ordinarily arise when preferences satisfy a 'single-crossing property,' they may emerge when this property fails. In that case, 'budget' brands are priced at marginal cost, while 'luxury' brands, though not intrinsically superior, are sold at higher prices to consumers seeking to advertise wealth. Luxury brands earn strictly positive profits under conditions that would, with standard formulations of preferences, yield marginal-cost pricing. The authors explore factors that induce Veblen effects and they investigate policy implications. Copyright 1996 by American Economic Association.