Word of the Week: Veblen Goods

Veblen goods: Products whose appeal rises along with their price. Named for Thorstein Veblen (1857-1929), the American economist and sociologist who famously defined “conspicuous consumption” as the chief activity of the leisure class.

Veblen goods are an anomaly: classical economic theory dictates that demand will decrease as price increases. The Veblen effect is related to the “snob effect” and the “bandwagon effect.”

Novelist, philosophy professor, and former diamond salesman Clancy Martin writes about Veblen goods in “All That Glitters” in the June 2010 issue of Harper’s (not online):

In our store in Arlington we used to have a large framed Thai rug—depicting a king on his elephant and spangled with cheap gems and gold and silver thread—that we bought in Bangkok for $5,000 and initially tried to sell for $25,000. It hung on the wall for three years as we slowly upped the asking price, and it didn’t sell until we were negotiating it down from $150,000; we closed the deal at $110,000. The worst case of a Veblen good I ever heard comes courtesy of my friend Dave, who was doing the pricing structure for Tiffany & Co. in their new Hong Kong flagship. He came across a bottle of perfume that sold for $12,000; Tiffany’s cost was around forty bucks.

Martin’s article—worth searching out in your local library—also introduced me to a few other diamond-industry terms. In industry-speak, an “enhancement” is a fake. Also:

Women who collect sparkly things as a passion are known in the industry as crows, and with a good crow it’s an addiction: you see her every month when she gets her paycheck. The wealthiest crows are called whales.

Read my other posts about the diamond industry: on the late diamantaire David S. Kwiat; and on selling diamonds in a downturn. If the subject interests you, I recommend reading The Heartless Stone: A Journey through the World of Diamonds, Deceit, and Desire, by Tom Zoeller, which explains the myth of diamond “scarcity” and reveals how the Veblen effect (and savvy branding) transformed formerly worthless brown stones into high-priced “chocolate diamonds.”

Comments

[Chris]

Aka Giffen Goods. I'm not sure which term came first though.

[Nancy Friedman]

Chris: As I understand it, there's a slight but significant difference between Veblen goods and Giffen goods. With Giffen goods, the rising price is the only factor affecting desirability, whereas with Veblen goods the concepts of conspicuous consumption and snobbery also play a role.

Here's an article about Veblen goods and Giffen goods:
http://www.lesjones.com/2009/09/23/word-of-the-day-veblen-goods/

[Phil Golden]

This is a great post and makes a good point. I have a friend who told me that after he finished dental school he worked for a couple of years ina clinic. After that he opened his own and was having a very difficult time getting new patients. He was offering all sorts of cheap pricing, but could not get anybody to come in.

He was given some advice that he should raise his prices drastically. He increased his prices by a multiple of 3 (!), and suddenly business was booming.

he explained to me that while everyone wants a deal, if you are cheap they think the quality is bad so they don't bother. If you are expensive they think the quality is great and they thought he must have been the best dentist in town.

It is all a matter of perception.

With diamonds it is the same. You sell it too cheap and people will think it must have flaws or deficiency's that they just don't see. Raise the price and you will have people interested. They might ask for a discount, but they will at least come in as a potential customer.

You want them to believe you are giving them quality (you should be giving them the quality they expect and are paying for but what they perceive is the point right now), and if the price is too cheap they will think there is some sort of scam or a quality issue and will stay away.

Thanks for the post.