The Veblen effect can be described as the positive impact of the high price of a product upon the demand for that product. In other words, it describes the phenomenon when a product becomes more sought-after precisely because it is more expensive. Normally, the prices of products can be regulated by the demand for it, that is, when prices go up, demand comes down as the number of people able to afford it decreases. The Veblen effect, however, describes the opposite process where, contrary to the economic law of demand, the expensiveness of a commodity actually increases demand.

One of the main reasons for this phenomenon is the fact consumers tend to believe that the increase in price itself evidences the product’s quality, thereby making the product more desirable.

The Veblen effect is named after the American economist and sociologist Thorstein Veblen, who first observed the phenomenon that our desire to buy certain products sometimes increase along with its price. One example of a product where the Veblen effect functions most notably, is designer handbags. This is because designer handbags, unlike mobile phones for example, is a positional good. Positional goods are luxury items whose allure lies in its scarcity and exclusivity. In other words, the benefit of having, for example, a diamond-encrusted handbag lies in the fact that so few other people can afford to have it.

In other words, there are two main reasons for the Veblen effect, which both relate to the perceptions of what a product does for the customer: 1) The perception that the quality of a product is directly linked to its price. In other words, the more expensive the product, the higher its quality; and 2) the notion of exclusivity which entails that the more expensive and the scarcer a product is, the greater the status of acquiring it becomes.

The main lesson that the reality of the Veblen effect teaches is us that the economic law of supply-and-demand does not always have the final say when it comes to determining a product’s price.