THE VEBLEN EFFECT: WHY A HIGHER PRICE CAN MAKE A PRODUCT MORE DESIRABLE
In most markets, raising the price makes people want less of something. But luxury markets can behave differently.
Imagine two handbags.
They look almost identical.
One costs:
€500
The other costs:
€5,000
You would normally expect the €500 bag to attract more buyers.
But what if the €5,000 price is part of what makes the bag attractive?
That is the basic idea behind the Veblen effect.
THE NORMAL RULE OF DEMAND
In basic economics, the relationship is straightforward:
Price rises → quantity demanded falls
If a coffee costs €2, more people may buy it than if it costs €20.
That's the ordinary law of demand.
But some products are purchased for reasons beyond their practical function.
A luxury watch doesn't simply tell time.
A designer handbag doesn't simply carry objects.
A supercar doesn't simply transport someone from A to B.
Part of the value can come from:
Prestige
Status
Exclusivity
Rarity
Brand identity
Social signaling
And that's where the Veblen effect becomes interesting.
WHO WAS VEBLEN?
The effect is named after American economist and sociologist Thorstein Veblen.
In his 1899 book The Theory of the Leisure Class, Veblen examined what he called conspicuous consumption.
The basic idea was that people could consume certain goods partly to demonstrate wealth and social position.
The product wasn't valuable only because of what it physically did.
Its consumption could communicate something about the person buying it.
That created an unusual possibility:
A higher price could make the product more attractive because the price itself becomes part of the signal.
Modern research describes this as a situation in which price can act as an indicator of prestige value.
THE PRICE BECOMES PART OF THE PRODUCT
Think about a hypothetical watch.
WATCH A
€100
Functional.
Well made.
Widely available.
WATCH B
€20,000
Also tells time.
But it is associated with:
A prestigious brand
Limited availability
Heritage
Exclusivity
Social status
The €20,000 price doesn't necessarily make the watch mechanically better by 200 times.
But it can communicate:
"This isn't an ordinary watch."
The price becomes part of the message.
WHY WOULD SOMEONE WANT THAT?
Because some purchases are partly social.
Imagine walking into a room wearing an expensive watch.
Nobody knows exactly how accurate its movement is.
They may not know what materials were used.
But they can recognize:
the brand
or
the design
or simply that the product appears expensive.
The purchase can therefore function as a signal.
Research on luxury consumption has found that status and social signaling can be important reasons consumers value luxury products beyond their functional characteristics.
THE STRANGE LOOP
This creates a fascinating business loop:
Higher price
↓
Greater exclusivity
↓
Higher perceived status
↓
Greater desirability among some consumers
↓
More willingness to pay
↓
Brand can maintain a higher price
The price isn't merely measuring the product's value.
In certain luxury markets, it can help create part of the perceived value.
BUT THIS DOESN'T MEAN "EXPENSIVE = BETTER"
This is one of the biggest misconceptions.
The Veblen effect does not mean that increasing the price of any product will increase demand.
Raise the price of bottled water from:
€1 → €100
and most people won't suddenly become desperate to buy it.
The effect depends on the type of product and the consumer's motivation.
Research has found that higher prices can increase luxury-brand choice under particular combinations of conspicuousness and perceived rarity.
So the effect is a special case, not a universal law.
THIS IS WHY DISCOUNTS CAN BE DANGEROUS FOR LUXURY BRANDS
Imagine a luxury brand normally sells a handbag for:
€5,000
Then it suddenly puts everything on sale:
€5,000 → €1,500
For an ordinary retailer, that could be fantastic.
For a prestige brand, it can create a different problem.
If consumers start thinking:
"Why should I pay €5,000 next time when they'll probably discount it?"
the brand's exclusivity can weaken.
Economic research on conspicuous products has examined exactly this tension: discounts can affect the brand image that makes the product desirable in the first place.
PRICE CAN BECOME A SIGNAL OF SCARCITY
Suppose a product is extremely expensive.
That alone doesn't necessarily make it desirable.
But combine the price with:
Limited supply
Strong brand recognition
Controlled distribution
High social visibility
and the price can become a signal:
"Not everyone can have this."
Scarcity itself can increase perceived desirability, and research on luxury consumption has examined the interaction between price, rarity and conspicuousness.
THE €500 VS €5,000 PARADOX
Imagine a company sells two functionally similar products.
PRODUCT A
€500
1,000 buyers
PRODUCT B
€5,000
300 buyers
The second product sells fewer units.
But:
€500 × 1,000 = €500,000
while:
€5,000 × 300 = €1.5 million
So selling fewer products at a much higher price can sometimes generate more revenue.
And if the higher price also strengthens the brand's prestige, the company may have another reason not to chase mass-market volume.
THIS CHANGES HOW COMPANIES THINK ABOUT COMPETITION
A normal company may ask:
"How can we make our product cheaper?"
A prestige brand may ask:
"How can we make our product valuable enough that customers accept a much higher price?"
Those are completely different strategies.
The first focuses heavily on:
efficiency
The second can focus on:
identity
exclusivity
craftsmanship
heritage
scarcity
status
brand meaning
THE PRICE CAN BECOME MARKETING
This is where the economics gets even more interesting.
Normally, marketing tells you why a product is valuable.
But with prestige products, the price itself can become part of the marketing signal.
A €50 product says something different from a €5,000 product.
The number communicates information before the customer even understands the technical specifications.
Academic research has examined how advertising and brand goodwill can make the Veblen effect more likely by connecting price with a product's prestige.
THERE IS A LIMIT
A luxury company can't simply keep raising the price forever.
At some point:
Price becomes too high
↓
Potential customers disappear
↓
Demand falls
The Veblen effect can operate over a particular range of prices.
Even research specifically studying the phenomenon finds that demand can eventually follow the more familiar pattern of falling as price becomes too high.
So the challenge for a luxury company is not:
"Make it as expensive as possible."
It's closer to:
"Find a price high enough to reinforce the desired positioning without destroying demand."
WHY THIS MATTERS BEYOND LUXURY
The idea is useful because it shows that consumers don't always buy products purely for their functional utility.
A purchase can also communicate:
Who am I?
What group do I belong to?
What can I afford?
What do I value?
How do I want other people to see me?
Once you understand that, pricing becomes much more than calculating production cost plus profit margin.
MAACAT PERSPECTIVE
The strange thing about the Veblen effect is that price can stop being just a cost and become part of the product's appeal.
For most products:
Higher price → less demand
But for certain prestige goods, under certain conditions:
Higher price → greater exclusivity → stronger status signal → greater desirability
That doesn't mean expensive products are automatically better.
It means something much more interesting:
Sometimes people aren't paying more despite the price.
The price is part of what they're paying for.
