Veblen goods

A Veblen good is something people want more as its price goes up. Normally a higher price pushes buyers away. With a Veblen good, part of what you are buying is the price itself. The tag tells you, and the people around you, that this is the good one.

That matters for your budget in two ways. A seller can sometimes sell more by charging more. And one expensive purchase can quietly reset what everything around it “should” cost. That second part is where one purchase starts leading to the next.

The silver spoon and the conspicuous price

In 1899 the American economist Thorstein Veblen published The Theory of the Leisure Class. In a chapter called “Pecuniary Canons of Taste,” he offered what he called a homely illustration. A hand-wrought silver spoon worth some ten to twenty dollars, he wrote, is usually no more useful than a machine-made spoon of the same metal, or even an aluminum one worth ten to twenty cents. Yet if the owner learned the costly spoon was only a clever imitation, the pleasure it gave, even the pleasure of looking at it, would drop by some eighty or ninety percent or more. “The case of the spoons is typical.”

Half a century later, in 1950, the economist Harvey Leibenstein gave the idea a name. In a paper in the Quarterly Journal of Economics, he split demand in two. Functional demand comes from the qualities of the thing itself. Nonfunctional demand comes from everything else, and its most important source, he wrote, is that the pleasure people get from a thing rises or falls because others are buying it, or because it carries a higher price tag.

He named three effects. Two of them, the bandwagon effect and the snob effect, depend on what other people buy. The third, the Veblen effect, depends on price: the extent to which demand for a good rises because it costs more rather than less.

Leibenstein also split price in two. The real price is what you actually paid. The conspicuous price is what other people think you paid, or more exactly, what you think they think. Where bargains and special discounts exist, the two can differ.

He did not claim the effect always wins. When a price falls, more people can afford the thing, but some buyers drop out because it now satisfies them less. Which pull is stronger decides whether demand goes up or down, and that can change from one price to another.

Price on the label, taste in the glass

In 2008 the researchers Hilke Plassmann, John O’Doherty, Baba Shiv and Antonio Rangel scanned 20 people with functional MRI while they tasted what they were told were five Cabernet Sauvignons at different prices. There were really three wines. One appeared at $90, its retail price, and again at $10. Another appeared at $5 and at $45. When the same wine carried the higher price, people rated it more pleasant, and activity rose in the medial orbitofrontal cortex, a brain area widely thought to track how pleasant an experience is. The authors concluded that price can change how pleasant people find a product, not just how they judge it.

One finding stands out for shoppers: the price tag changed the experience itself.

Why a high price can add value

Leibenstein’s answer is that the price carries meaning. If you value a thing partly for what others think it cost, a high price stops being only a cost. It becomes part of the product. Veblen saw the habit run deep enough that people repeat the maxim “Cheap and nasty” without a second thought.

The economists Laurie Simon Bagwell and B. Douglas Bernheim showed in 1996 that the pricier thing does not even need to be better. In their model, when buyers want to show their wealth, budget brands sell at cost while luxury brands that are no better sell at higher prices. Status is part of the story; for the rest of it, see conspicuous consumption.

How one price tag raises the next

Say you buy a $600 leather armchair, and part of its appeal is the price: it feels like a serious chair. Beside it, your $30 lamp and $40 side table now look like they belong in a cheaper room. So you replace them with a $200 lamp and a $350 table, because anything less would let the chair down. Then the rug starts to look wrong. This is the Diderot effect running through price. The first item’s price becomes the standard each neighbor has to meet, and that high anchor makes every new price feel normal. A $600 chair has become $1,150 of furniture, with the rug next. The price set the bar, and the room had to clear it.

Where a high price does the selling

Price works as a selling point in plenty of places:

• Luxury goods. Some makers raise prices rather than cut them, because a lower tag could make the item less wanted by people who buy it partly for the price.
• Premium tiers. A “premium” or “pro” version costs more for small extras, and the higher price itself hints that it is the smarter choice.
• Limited editions. A short run at a high price tells buyers the item is special before anyone has used it.
• Gifts. People often pay more for a present because the price feels like a sign of care and quality.
• Restaurants and wine lists. A pricier bottle reads as a better bottle, and the wine study suggests it may even taste better for that reason.

How to take the price tag out of the decision

1. Compare without the prices. When you can, taste, try or line up options before you see what they cost. Pick first, then look at the tags.
2. Name what the extra money buys. Before paying more, write one sentence on what you get that the cheaper version lacks: a longer warranty, a better fit, a sturdier material. If the only answer is the price, that is your answer.
3. Work out the price per use. Divide the price by how often you will really use it with the Cost per Wear Calculator. A costly item you use daily can beat a cheap one you use twice.
4. Set your ceiling at home. Decide the most you will pay for the category before you shop, so a high price on the shelf cannot become your new normal.
5. Price the neighbors on their own. After a big purchase, judge each follow-up item at its own sensible price, not at the level the first one set.

When paying more is the right call

Paying more is not always a Veblen trap. Sometimes the expensive version really lasts longer or works better, and over the years it costs less; our buy-it-for-life playbook covers how to tell. Some people also knowingly pay for the pleasure a fine thing brings, the way Veblen’s spoon owner enjoyed real silver. That is fine when it is a choice made on purpose. For the wider economics of upgrading, see the Diderot effect in economics.

The test is simple. Imagine the price tag cut in half and nobody ever knowing what you paid. If you would still want it just as much, buy it. If the appeal fades, the price was doing the selling.