Veblen Goods: An Example From The Real World

Sep 10, 2016

 

Veblen goods (goods that increase in demand as their price goes up) might seem theoretical but they do exist. A look at a Veblen good from the real world.

 

The law of demand says that there is an inverse relationship between price and demand. According to the law of demand as the price of a good goes up demand for that product goes down. And as price goes down demand goes up.

It seems like common sense and, in most cases it holds true to varying degrees. Demand for some essential goods (like fuel, food staples, etc.) might fluctuate less with price than other non-essential discretionary purchases, but generally the pattern holds true.

Veblen good is different. A Veblen good is a luxury product that is socially recognized as being exclusive and expensive. In addition to any other more tangible benefits (the good itself may be of high quality) possession or consumption of these goods serves as a public display of wealth. Such goods experience greater demand as their price goes up.

But it all feels kind of theoretical. Take something like a Ferrari – part of the demand almost certainly comes from the halo effect the high price imbues and the exclusivity that same high prices creates. But they’re still great looking high-performing cars… surely demand wouldn’t actually drop if prices decreased?


Real World Example Of A Veblen Good

Cristal is a very expensive “prestige cuvée” champagne. It’s high price and exclusivity make it a status symbol and, in the mid-90s, it started being frequently referenced in hip-hop culture.

 

Cristal will go down in the record books as one of the most celebrated spirits in the rap community.

 

It was mentioned in lyrics by rappers including 50 Cent, A$AP Rocky, The Notorious B.I.G., Raekwon, Sean Combs, and Jay-Z.

In 2006 the president of the company that makes Cristal was asked if he thought thet association with rap culture would harm the brand.

 

That's a good question, but what can we do? We can't forbid people from buying it. I'm sure Dom Pérignon or Krug would be delighted to have their business.

Frederic Rouzaud

 

The comments was seen as racially motivated at best, and outright racist at worst. Leaders in the Hip Hop community called for a boycott and former brand champion Jay Z promised to never mention or consume the champagne again.

 

It has come to my attention that the managing director of Cristal views the 'hip-hop' culture as unwelcome attention. I view his comments as racist and will no longer support any of his products through any of my various brands, including the 40/40 Club, nor in my personal life.

Jay-Z

How much would those comments really affect sales? The entire US market accounted for just 15 per cent of Cristal sales, with only a fraction of that marketing being the hip hop community.


Several nightclub owners and managers, however, said they were not certain whether the boycott would spread beyond a handful of millionaire musicians, athletes and movie stars. "I think I've noticed a slight drop-off in Cristal in the club," said Noel Ashman, the owner of the Manhattan celebrity haunt Plumm, where Cristal served at a table is $550 a bottle.

Jay-Z Puts a Cap on Cristal – New York Times | July 2, 2006

 

The early consensus was that any impact on demand would likely be limited. The product had been successful long before it started appearing in rap lyrics, and with or without the endorsement of the hip hop community the champagne was highly rated.

 

…because Cristal is produced in very small quantities and only in vintage years (1999 is the latest), the bad publicity may have little overall effect on sales; plenty of drinkers are more attracted by its 98-point ratings from wine critics than by its mention in rap songs.

 

But even a small decrease in demand can cause a glut in supply and retailers were soon overstocked. The problem was exacerbated by the fact that the producer of Cristal, who also produced other still popular wines and champagnes, forced them to keep buying it. If they didn’t they could not purchase the wines and champagnes that remained in high demand. The end result was a glut of the product on their shelves, and a lot of money tied up in slow-moving inventory.

The simple solution was discounting – lowering prices should increase demand. But in the case of Veblen goods the high price is a large part of what creates the demand. Discounted exclusive champagne suddenly doesn’t feel so exclusive, and demand dropped even further. Cristal fell rapidly in popularity from #8 in 2005 to #63 in 2006.



Category: Examples

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Related Material

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Price Elasticity (aka Price Elasticity of Demand)

Any research on pricing you will mention “price elasticity”. Shortened from “price elasticity of demand” it is important (but easy) to understand.

Price Elasticity – Examples

Examples of price elasticity of demand – situations where changes in demand exceed changes in price.

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Examples of price inelasticity – situations where demand does not change correspondingly to price.

Law Of Demand

The inverse relationship between quantity and price – as price increases demand decreases. Similarly a decrease in price will result in greater demand.

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