The Veblen Effect

Hands up who wants a Rolls-Royce? A convertible Bentley? An Aston Martin DBS?  Ok, apart from Danny Last and Big Deaks who can’t drive.  We would all love to own one, right?  But for most people it is just a dream for when we win the lottery.  But what if they reduced the price by 90%?  Would you still want one if every Tom, Dick and Big Deaks could afford one?  Second thoughts eh?  That is the Veblen effect in action for you.

Thorstein Veblen came up with this theory back in 1899.  Whilst it is unclear whether Thorstein ever made it across the Atlantic and up to Bramall Lane but let’s assume he did. As Sheffield United had just won the FA Cup and paraded the trophy around the ground, Veblen was unhappy that only a few thousand fans were there to watch the momentous occasion, singing a version of Annie’s Song that was so cruelly credited to John Denver nearly eighty years later.  He hated the fact that it was an “exclusive” club, with ticket prices kept high to keep out the local riff-raff.  “Let them eat Eccles Cake” he famously said, referring them to becoming Sheffield Wednesday fans.

Veblen’s theory was relatively simple.  He noted that some types of luxury goods, which today would be such items as bottles of Domaine de la Romanée-Conti Romanée-Conti Grand Cru, Gucci handbags, Rolls-Royces and tickets to see United were prestige items, or as he liked to call them, Veblen goods.  He noted that in decreasing their prices, people’s preference for buying them also diminished because they are no longer perceived as exclusive or high-status products. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the goods even more preferable.  So he argued that Sheffield United should actually increase their ticket prices to drive up attendances.

Even a Veblen good is subject to the dictum that demand moves conversely to price, although the response of demand to price is not consistent at all points on the demand curve meaning that it is not simply good enough for a football club to slash its prices as people will not see any value at all in what is now on offer (See our previous article on Pay What You Want Theory). There’s been a number of examples where brands have seen their luxury tag diminished as they have reduced prices and a different type of customer has bought into the brand – Burberry and Range Rover for instance.

It seems someone in the Premier League found Veblen’s original work in a drawer when moving desks at Premier League HQ a few years ago and passed the idea across to the clubs who immediate put their ticket prices up thinking the fans will flock through the gates.  They were wrong, Veblen was wrong and yes, we all want a Rolls-Royce for the price of a Lada.

And that, ladies and gentlemen, is Veblen Theory in a nutshell.

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