What Are Veblen Goods? Explained

Hands up if the name Thorstein Veblen rings a bell? I’ll wait … anyone? Anyone? No? Really? How about the term conspicuous consumption? Ah, that’s better. 

Let me put you out of your misery. Thorstein Bunde Veblen was an American economist of the late 19th century who noticed that the value of certain material goods – particularly those that fall under the passion asset collectible umbrella – increased in direct correlation with their demand. The goods that would later become known as Veblen goods were those that were (still are) considered status symbols. Basically, we are talking about diamonds and Ferrari’s here, but also artwork, certain designer clothes and handbags, some sports cars and yes, fine wine. But, while some wines are considered Veblen goods, don’t rush to your wine investing app just yet.

What Are Veblen Goods?

Fine wine has long been loved by investors and economists alike for its ability to retain its value even in times of economic freefall. During the first two decades of the 21st century the stock market suffered badly, not once but twice. The first was during the 2008 recession, when collapse of the housing market — fueled by low interest rates, easy credit, insufficient regulation, and toxic subprime mortgages — led to the economic crisis. No sooner had high net worth individuals (HNWI) clawed their way back to safety than the COVID-19 pandemic hit. The stock market took a second spectacular nosedive, wiping out many fortunes and small businesses in its wake. 

During these dual economic crises, most Veblen goods retained their value. A Veblen good has an upward sloping demand curve which is largely due to their exclusive nature and covetability. This curve runs counter to the typical downward-sloping curve of most material goods, which are known as Giffen goods in economic circles. A Giffen good is the direct opposite of a Veblen good i.e. an inferior product that does not have easily available substitutes.

The first mention of Veblen goods was in The Theory of the Leisure Class, Thorstein Veblen’s 1899 opus. It was here that the American economist noticed that when the price of a Veblen good goes up, the demand goes up; when the price of a Veblen good goes down, the demand goes down. 

Thus it would not be remiss of us to note that Veblen Goods are a class of goods that do not strictly follow the law of demand. Usually, goods (services can also be considered a “good” in this case) follow an inverse relationship between their price and their value. Think of that state of the art flat-screen TV that was worth 5k two years ago but is only worth 2k now and you’ll get the idea. Similarly, as goods (and services) become more common, their price decreases. Veblen goods thus violate the law of demand after prices have risen above a certain level. 

A great case study for Veblen would be Apple.com. Apple set the price of the original iPhone at €500; now, the iPhone 12 Pro sells for over €1,000 and still has queues of people in front of its shopsaunch days. Certain trainers follow the same theory. Nike’s Air Jordan 1 collaboration with rapper Travis Scott dropped onto the primary market at €180. They were selling for €1,200, less than a month later. The vast price increase only makes the shoes or the phone or, hopefully in Vindome.net’s case the fine wine, makes the object more covetable.

In a nutshell: 

Veblen good: The more expensive they are, the more customers want them. The lower a Veblen goods price, the less people will demand it.

Normal good: The more expensive they are, the less customers want them. The lower a normal goods price, the more people will demand it.


↓ Lower Price ↑ Higher Price

Normal Good ↑ Higher Quantity ↓ Lower Quantity

Veblen Good ↓ Lower Quantity ↑ Higher Quantity

Examples of Veblen Goods

Fine wine. In a posh restaurant, diners may avoid purchasing the cheapest wine – because it indicates poor taste or lack of education. It is a common (mis)perception that the higher the price of the wine, the better quality. Dishonest restaurateurs may capatise on this by increasing the price of the wine in order for it to sell more.

Modern art. If art is sold at €1, common perception is that it is no good. But if the same pieces are sold for €100, unsuspecting buyers may feel it is better (Banksy is a master at upending this conception). Art may also be subject to the bandwagon effect – if an artist becomes in vogue, people want to be part of it. This too could be said of fine wine, but only in some markets. 

Designer clothes. Some clothing retailers have found increasing the price of luxury ‘branded’ items can sometimes increase sales, e.g. branded jeans. The same effect can also be achieved  by creating a lower price brand (D&G for Dolce and Gabbana) or by creating products that carry the name (such as beauty products). 

What Is the Veblen Effect?

The Veblen effect is when conspicuous consumption takes place with the primary goal of showing off wealth as a means to manifest social power and prestige. Whether this is anchored in reality or fallacy, the effect is real. It should be noted that there is also a ‘Counter-Veblen Effect’, where people believe they will be admired for grabbing bargains or for being austere with their money.

Reasons for the Veblen Effect

It should be noted that the Veblen effect affects primarily the upper middle classes, and thus certain sociological parallels could be drawn. The relationship between education and the conspicuous consumption of goods is another way of saying “keeping up with the Jones”. In Elizabeth Currid-Halkett’s thesis Veblen Goods and Urban Distinction: The Economic Geography of Conspicuous Consumption, A Survey of 21 Cities for the University of Southern California, she notes “Luxury goods are much more likely to be consumed by those with high levels of education. At the same time, levels of conspicuous consumption decline with education. This suggests that education may alter decisions of households to save more for retirement or purchase more insurance, which do not reveal their social status”.

Cognitive Biases & Concepts Related to the Veblen Effect

The Veblen effect is particularly pertinent in today’s Instagrammable, social media envy-led world. Not only are “normal” people given a platform in which to show off, followers of these mostly average men and women are led to believe that the influencers’ watches, cars, holidays etc. are something to which the “normal” person needs to aspire to. This cognitive bias is of vast sociological importance and is incredibly dangerous (in some cases, fatal), particulary to Gen Zs. 

The effects can be broken down as follows: 

  1. The Bandwagon Effect

Or I want what they’ve got. The bandwagon effect refers to the correlation between increased demand for a commodity due to the fact that others are also consuming the same thing. Basically, demand for the item fuels the desire for it. 

  1. The Snob Effect

Or I want to stand out from the crowd. The snob effect is when a good’s value actually decreases due to its popularity (see Bandwagon Effect, above). This is due to the fact that in order for a good to remain covetable, it needs to remain exclusive.  

  1. The Common Law of Business Balance

Or price is quality. Business balance dictates that low priced goods indicate that the producer may have compromised quality (think of fast fashion stores such as Primark versus “better” ones). Another way of saying this is “you get what you pay for”.

  1. The Network Effect

The term network effect refers to any situation in which the value of a product, service, or platform depends on the number of buyers, sellers, or users who leverage it.

  1. The Hot Hand Fallacy

Or beginner’s luck. Hot hand was considered a cognitive social bias that someone who experiences a successful outcome has a better chance of success in the future. Think of a novice card player who wins a fortune on their first poker game, or a football player who makes three successful goals. These people would be considered to have “hot hands” (or perhaps feet in the latter case). This example can easily be cascaded to investors. 

How to Use the Veblen Effect When Investing in Wine

So, how does the Veblen effect affect fine wines? Well, certain wines such as Latour, Lafite, Margaux, Petrus, Haut Brion and Cheval Blanc are considered celebrity wines (thus a covetable, or Veblen good). While certain vintages will sell for higher prices than others, these big hitters do not depend on critic ratings in order to sell. Their reputations precede them – there is a strong chance that, based on the fact that they are famous, they will sell out before they have even been bottled. This is because they are an accepted part of the luxury goods world. Everyone who needs to know knows that a bottle of Cheval Blanc or Margaux can be worth the price of a small car. Ergo, if you’re willing to drink your wealth then you must have an awful lot of it. These wines, while delicious, are not bought for their depth of body or flexible tannin structure. They are bought, in part at least, to show off. 

The key to fine wine investing is not only to consider the big brands. The savvy wine investor understands that the greatest ROI comes from buying low and selling high. Many non-classified wines have this potential and offer far greater year on year returns than the big names. Yes, your bottle of Lafite-Rothschild 1996 looks sexy in your cellar, but will it really be able to compete with a 2015 Sassicaia that doubled its value in four years? No, we don’t think so either. 
If you want to know more about which wines offer excellent ROI, check out our guide on how to invest in wine.

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