What is the Veblen effect?

The Veblen effect is an economic concept where the demand for a product increases as the price increases, contradicting the traditional supply and demand theory. This effect is associated with luxury goods or status symbols, where the higher prices enhance the perceived value or prestige of the product.

For instance, luxury brands like Rolex or Louis Vuitton capitalize on this effect. Even though these brands may produce large quantities, their products remain highly valued due to their brand power and perceived exclusivity. The increased price can then serve as a social signal, communicating the owner's wealth or status, thus making the product even more desirable as more people purchase and advocate for the brand 1.

In summary, the Veblen effect illustrates how some goods can defy conventional market logic, where increasing the supply and price can paradoxically increase their desirability due to the associated social prestige.