Stature, Snobbery and Satisfaction- Unveiling The Veblen Effect

-By Sharanya Tulsyan

As we navigate online markets in search of something as simple as a hair dryer, we often encounter two choices: one adorned with glossy images and a hefty price tag, promising sophistication, and another, more affordably priced option that might be as capable but appears simpler. In the absence of prior research or knowledge about either, our minds impetuously tend to assume that the pricier option must be of superior quality. Why do we consistently link higher prices with better quality? Why do we lean towards spending more money on the same item?

This inclination is not an arbitrary quirk or peculiarity but a well-defined economic phenomenon, the “Veblen Effect.”

The Veblen effect is an economic anomaly that arises when individuals show a tendency to acquire costlier goods despite the availability of similar, cheaper counterparts. The concept was coined by an economist, Thorstein Veblen, in 1899 when he aimed to explore the extravagant and idiosyncratic habits of the upper class with respect to the prevailing psychological and social scenarios in his book “The Theory of the Leisure Class.” There are two primary rationales that justify the prevalence of this concept.

Thorstein Veblen defines conspicuous consumption as the habit of purchasing and utilizing items that are more expensive, rare, or of superior quality in order to flaunt one’s riches or social standing. According to the theory, consumers purchase luxury products for their symbolic meaning as status symbols as much as their practical worth. The purchase of goods and services is primarily driven by the desire for status and is used to demonstrate financial power and social superiority. Now the psychological satisfaction derived from the display of wealth will come only from buying expensive goods, and thus they end up buying expensive goods despite the availability of cheaper substitutes.

This can be clearly seen in the luxury goods industry, where handbags, perfumes, sunglasses, etc. are sold for far more than their functional worth.

Originally, the concept of conspicuous consumption was exclusively applicable to the upper class, but with continuous increases in the standard of living and awareness, this socio-economic behavior is evident among the other classes as well.

Heuristics are mental shortcuts that are frequently employed to simplify difficulties and prevent cognitive overload. Heuristics are a part of how the brain is wired or how it has evolved. The price-quality heuristic is a simplified way often used by consumers to assess the quality of a product or service by its price, giving basis to the assumption that more expensive products are of higher quality as compared to less expensive products. The foundation of this heuristic is the notion that increased prices are a reflection of increased production expenses, which are then thought to result in better materials, workmanship, and overall product performance. Though logical to a certain extent, this heuristic is the main cause of overpricing and irrational purchases. Applying this  without any understanding of the features or functional benefits offered by the product, ignorant consumers purchase the costlier products in their quest for quality, thus showing proof of the Veblen effect’s prevalence.

Several social experiments have been conducted time and again to prove the placebo created by premium prices.

In a recent event, top socialites and lifestyle influencers in Gurugram were invited by Bellavita to an exclusive launch of FRAGO Italia, a spoof premium perfume brand. The launch took place in a high-end and elegant setting at the SITIO bar; the attendees had wine and cheese as well as a first-hand look at the scents from the soon-to-be-launched brand, Frago Italia. Overall, the ambiance resonated with affluence and luxury.  The guests were drawn in by the exquisite packaging, exceptional quality, and premium price, which encouraged them to make purchases. The guests’ gave impressively positive feedback, filled with admiration for the quality and presentation of the goods. This is where the experiment took a surprising turn, though. The truth was revealed by Bellavita. The guests paid ten times the actual price of Bellavita perfumes, but all of the FRAGO Italia perfumes were actually Bellavita perfumes with masked FRAGO  Italia labels. When the guests discovered that the fragrances they had bought had only cost Rs. 599 in contrast to the sums paid by them, which were more than Rs. 5,000, they were left astounded. 

Another example of a social experiment that goes on to prove the Veblen effect is the Chivas Regal 18 experiment. In an experiment in 2007, Chivas Regal increased the price of their Chivas Regal 18 whisky by 20%. Following the law of demand, an increase in the price of a commodity should ideally reduce the quantity demanded, but abnormally, the sales of the whisky increased in spite of the price increase. This indicates that after the price increase, consumers were willing to pay more for the whisky because they associated its increased price with enhanced quality and also got higher psychological satisfaction from consuming an exclusive and socially superior product. To complement the surge in prices the same year, Chivas Regal launched another campaign, “This is The Life,” wherein it tried to make the brand synonymous with exuberance and luxury. This further accelerated the Veblen effect due to an apparent association with conspicuous consumption.

Numerous other experiments and studies have attempted to prove the validity of the Veblen effect, but the Veblen effect permeates even the minutest and most apparent instances of our mundane transactions and experiences. It has become a prominent element in our collective social mindset as well as our individual perspectives. Its existence is ubiquitous and so seamlessly woven into our everyday decision-making that we often fall prey to it with no notice of its irrationality. Sellers often exploit this tendency amongst consumers in pricing and marketing their products.

Every time we attempt to make a rational decision, we are constricted by the persuasive influence of this effect. The best that can be done from our side is to be consciously aware of and educate ourselves about such phenomena to minimize their impact.