Veblen good
A commodity is a Veblen good if people's preference for buying it increases as a direct function of its price.

The definition does not require that any Veblen goods actually exist. However, it is claimed that some types of high-status goods, such as expensive wines or perfumes are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products.

The Veblen effect is named after the economist Thorstein Veblen, who invented the concepts of conspicuous consumption and status-seeking.

The Veblen effect is one of a family of theoretically possible anomalies in the general theory of demand in microeconomics.

Other related effects are:

the snob effect: preference for a good decreases as the number of people buying it increases, and

the bandwagon effect: preference for a good increases as the number of people buying it increases;

Note that none of these effects in itself predicts what will happen to actual quantity demanded for the good (the number of units purchased) as price changes - they refer only to preferences or propensities to purchase. The actual effect on demand will depend on the range of other goods available, their prices, and their substitutabilities for the goods concerned. The effects are anomalies within demand theory because the theory normally assumes that preferences are independent of price or the number of units being sold. They are therefore collectively referred to as interaction effects.

Thornstein Veblen described conspicuous consumption. This he said was consumption designed to show how wealthy a person was. Outlandish dress for example rendered the wearer unfit to do jobs of work. The wearer demonstrated superiority over the working class. The elaborately dressed woman also served the purpose of demonstrating the wealth of the man she belonged to. (Veblen enjoyed provoking people!)

The hypothesis that resulted was that people buy some goods for their status value. The more expensive the goods are, the more people will desire them. Thus there will be an upward sloping demand curve.

Evidence for the existence of these goods is weak. Like Giffen goods, it is hard to prove that increasing price of the good leads to an increase in demand. It is perhaps impossible to avoid the charge that no other determinant of demand changed during the period of experimentation or observation. Thus the increase in demand may not be caused by the price change rather a change in one of the determinants, for example the price change may have created some extra publicity causing the whole demand curve to shift to the right.

A Veblen good is a good that’s quantity demanded rises when its price rises. Their existence is doubtful. Veblen goods are sometimes called goods of ostentation.

Note too that the interaction effects are a different kind of anomaly from that posed by a Giffen good. A Giffen good is one for which observed demand rises as price rises, but the effect arises without any interaction between price and preference - it results from the interplay of the income effect and the substitution effect of a change in price.

Giffen good

For most products, price elasticity of demand is negative. In other words, price and demand pull in opposite directions; price goes up and quantity demanded goes down, or vice versa.

Giffen goods are an exception to this. Their price elasticity of demand is positive. When price goes up the quantity demanded also goes up and vice versa.

In order to be a true Giffen good, price must be the only thing that changes to get a change in demand.

Giffen goods are named after Sir Robert Giffen, who was attributed as the author of this idea by Alfred Marshall in his book Principles of Economics.

The classic example given by Marshall is of inferior quality staple foods whose demand is driven by poverty, which makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food.

Marshall wrote in the 1895 edition of Principles of Economics: As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.

There are 3 necessary preconditions for this situation to arise. They are:

1. The good in question must be an inferior good and so inferior that the income effect is greater than the substitution effect; 2. there must be a lack of close substitutes; and 3. the good must comprise a substantial percentage of the buyer’s income.

Any good where the income effect more than compensates for the substitution effect is a Giffen good.

Despite years of searching, no generally agreed upon example has been found. A 2002 preliminary working paper by Robert Jensen and Nolan Miller made the claim that rice and noodles are Giffen goods in parts of China.

One reason for the difficulty in finding Giffen goods is Giffen originally envisioned a specific situation faced by individuals in a state of poverty. Modern consumer behavior research methods often deal in aggregates that average out income levels and are too blunt an instrument to capture these specific situations. It is for this reason that many text books use the term Giffen Paradox rather than Giffen Good.

Some types of premium goods (such as expensive French wines, or celebrity endorsed perfumes) are sometimes claimed to be Giffen goods. It is claimed that lowering the price of these high status goods can decrease demand because they are no longer perceived as exclusive or high status products. However, since the nature of the high status good changes significantly with a substantial price drop, these goods are not considered to be Giffen goods, but rather to be Veblen goods. This distinction is maintained by the assumption (some would say fictitious assumption) that a change in the price of non-Veblen goods will not significantly change the perceived nature of the good itself.

We must remember that economic models are not real, they are just models of reality. Some models are better than others and some are actually poor.

The Giffen paradox is an interesting model, but there is little firm evidence to support it. Finding the necessary evidence is difficult. As in many models we assume ceteris paribus. Whoever does find some data to support the Giffen paradox has to show that no other determinant of demand has changed causing the whole demand curve to move to the right. A similar problem occurs for Veblen Goods as well.