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There is a class of goods where there exists an inverse relationship between the price of a good or service and the quantity demanded of that good or service. These goods are called Veblen goods and violate the law of demand after prices have risen above a certain level.
The Veblen Effect
The Veblen Effect is about the impact of a higher price of a commodity on the quantity demanded of that commodity.
It is named after its creator, Thorstein Veblen, an economist and sociologist who studied the phenomenon of conspicuous consumption in the late 19th century.
He observed how the higher class whom he called the leisure class, would spend anything just to be seen as having arrived at a higher level. It is also called a kind of snobbishness for paying a higher price.
Reasons for the Veblen Effect
1. Perception of quality
In Veblen’s analysis of conspicuous consumption, it was noted that for certain luxury goods and services, a higher price was often associated with the perception of higher quality. Therefore, an increase in price was seen as evidence of the producer improving quality.
For example, the demand for a designer handbag often increased with a high price. The price increase was viewed by consumers as evidence that the producer of the designer handbag has improved the quality of the handbag.
2. Positional goods
These goods are often positional goods. The quantity demanded of a positional good depends on how this is distributed in society. Veblen goods often exhibit a negative positional effect, i.e., the quantity demanded of a Veblen good increases with a reduction in the distribution of the good. It occurs because the utility gained by a consumer from holding such a good arises purely from the fact that few other consumers hold it.
For example, the utility gained by a consumer from owning a diamond-encrusted handbag might arise primarily from the fact that few other people in society can afford to own such an object. Thus, the diamond-encrusted handbag acts as a positional good.
The effect on education
Very often, people go to higher priced schools and colleges to be considered elite. Fortunately, with the digital world making education accessible to all, wherever they may be, the Veblen effect is losing its effectiveness.
While getting admission in Ivy League schools or institutions like IIMs in India requires excellent grades and scores and only a few can make the cut, most universities know that students do not mind paying high fees because of its perceived value.
Instead, we could connect to a well reputed institute ourselves that does give value even when the prices being affordable.
The Veblen effect is definitely not applicable to learning and education. We need to be aware of course but not succumb to its effect. In education, we could definitely ignore the Veblen effect and learn to be innovative and successful.
We at IDM have ensured we give quality education at reasonable rates for we want all to study and never make education just for the richer classes so the Veblen effect is definitely not something we subscribe to.