The Impact of the Veblen Theory on Designer Brands

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The Impact of the Veblen Theory on Designer Brands

 Human beings are mindful of what others think of them, this is common knowledge. The fact of the matter is that we seek recognition, as well as the approval of others. Our desire for recognition plays a large role in our shopping habits, specifically of designer brands. This idea begins to explain Thornstein Veblen’s theory. The Veblen Theory stems from the concept that consumers are willing to pay more for products that signal a higher status to other consumers and peers (Kaus 64).  This paper will address the Veblen theory in more detail, as well as its effects on consumption of designer brands. Typically, designer brands tend to thrive using consumers’ need for approval to drive their pricing. However, if the brand takes this too far it may lose its appeal and contract a diminishing consumer market (“Demand Curve”). This paper will also address how the practice of counterfeiting and different demographics effect the consumption of Veblen goods.

What is the Veblen Theory?

 The Veblen Theory is officially referred to as the Theory of Leisure Class. The main idea behind this theory is “conspicuous consumption,” or signaling one’s wealth through the purchasing of specific products (Aronsson and Johansson-Stenman 552). In the economy, we typically see the quantity demanded (the amount of goods that consumers are willing and able to purchase) decrease as the price of a good increases, causing a downward sloping demand curve. However, Thornstein Veblen recognized that for certain goods, the quantity demanded increased as the price of the good increased, causing an upwards sloping demand curve (“Demand Curve”). What causes this upward sloping demand curve is referred to as the snob effect. “Snobs” are consumers that typically look for higher priced goods in order to show-off their economic status. The idea is that snob consumers will only purchase certain goods which they believe will show off their wealth. This causes certain higher priced products to be more in demand (Bekir, Et. Al 170). A normal demand curve is downward sloping. Veblen recognized that the quantity demanded for certain goods decreases, causing the demand curve to remain downward sloping, until the price of the good reaches a point where snobs hold their valued price (Aronsson and Johansson-Stenman 551). From that point, the demand curve becomes upward sloping, which is why a Veblen demand curve typically appears as a “C” shape (see Figure 1). 

Figure 1: Veblen Demand Curve

Source: Consumer-Behavior 485, The Veblen Effect, July.2017.

Veblen explained the change in the demand curve by theorizing that consumers desire approval and recognition from others. The more expensive the product, the higher the status that consumer gains relative to other consumers. Hence, Veblen Goods are defined as goods which correlate with Veblen’s Theory; as their price increases, so does the quantity demanded of the good (“Demand Curve”). The major difference between conventional economic models and Veblen’s model is the way in which consumption is analyzed. Typical economic models look at consumption without considering what drives consumption habits, while Veblen’s model looks at consumption as being related to other consumers. This is beneficial in revealing consumers’ status-enhancing habits when making purchases (Aronsson and Johansson-Stenman 552).

 The purchase of Veblen goods is for the consumers’ enjoyment, as well as an indication of financial success to other consumers (Godey 1463). The main concept behind Veblen’s Theory of Leisure Class is the idea that consumers pay for expensive goods that they perceive as increasing their social status. If a good is thought to alter a person’s appearance so that they appear as though they are of higher status within society, the consumer is willing to pay a higher price for that good. People view material objects as reflecting who they are. Thus, ownership of a product that is highly priced is viewed as increasing one’s image of wealth compared to others, and in turn may also boost self-esteem (Kempen 207). According to a survey of students, in order to signal to peers that they are financially wealthy they direct their spending to designer apparel and accessories (Kaus 65).  Social recognition from purchases of Veblen goods is only gained if the good is recognizable by all consumers, even those not making Veblen purchases (Kapfrere and Valette- Florence 122).  The positive relationship between how well-known a brand is, and Veblen purchase intentions is also due to the associated perceived status enhancement (Hassan, Husić-Mehmedović, and Duverger 420).

  Nevertheless, increasing status is not the only factor that makes something a Veblen good. Products that tend to be exclusive in availability tend to have a higher demand than products that are easily accessible. This is known as the scarcity principle, which implies that scarcity increases the apparent worth of products causing consumers to be willing to pay a higher price for goods that appear to be more exclusive (Janssen 47). The desire for exclusivity often can drive the purchasing decisions made by consumers. Most large firms in the fashion industry are aware of this and will use the idea of exclusivity to sway their demand market (Tereyağoğlu and Veeraraghavan 2183). Consequently, to be a Veblen good, the product must be exclusive enough for consumers to believe that ownership of that product will boost their status in society relative to other consumers (“Exclusivity for Everyone”).

Consumerism of Veblen Goods

 During the economic recession of 2007 to 2010, the global market for Veblen goods experienced a decline of annual growth rate by one percent. Since then, the global market has been experiencing a growth rate of two percent annually (Hassan, Husić-Mehmedović, and Duverger 417). Consequently, in the past twenty years the number of consumers purchasing Veblen goods has increased by about 330 million. This increase was strongly impacted by the purchasing of designer handbags, clothes, and jewelry, which has grown by twice the global rate for Gross Domestic Product (GDP) (“Exclusivity for Everyone”). Over time, the role of exclusive luxury brands in society has changed tremendously. Today, consumers continue to pay higher prices for a certain brand simply because it symbolizes a specific way of life (Kempen 207).Additionally,  consumers are willing to pay excessive prices for Veblen goods, especially in the world of designer brands, due to their belief that it gives them access to social groups they wouldn’t be considered part of without ownership of these goods (Kaus 64). By owning these brands, they are indicating to others that they are just as well off, or better off financially than those around them. However, the key to status signaling through purchasing habits is exclusivity. Consumers have higher demands for exclusive designer brands. If a brand is too readily available, it loses the appeal (“Demand Curve”). 

There are different types of consumers in the market for Veblen Goods, or exclusive brands. One type of consumer is snobs, briefly mentioned previously, which are wealthier consumers who are looking to purchase exclusive brands to signal their own wealth to other consumers (Bekir, Et. Al. 170). There are also conformists. Conformists typically look to fit-in with other consumers in their purchasing decisions but are not willing to pay high premiums for exclusive brands. These are the consumers who are most likely to buy counterfeit products in order to appear wealthier than they are for the sake of fitting in with the higher class (170). Lastly, we have aspirational consumers. Aspirational consumers are those who seek exclusivity, like the snobs, and are willing to pay high prices for exclusive brands but have strict budgets. Typically, their purchasing decisions are similar to the conformists in that they will buy counterfeit goods in order to attempt to achieve the exclusiveness they seek (171). It appears all consumers desire to be viewed as the “snobs” in the market. They want to be seen as being financially wealthy to the point where they too can purchase these high-end exclusive brands. This is a main reason why the Veblen demand curve is upward sloping past the point of the valued snob price (Figure 1).

The Role of Exclusivity

  The purchase of an exclusive good creates an increase in utility. The more common a brand is, the lower its value is seen as. Thus, an increase in consumption of a designer brand decreases the utility for consumers who already own that brand (Pruzhansky 228). By increasing the number of consumers purchasing a luxury product, the number of negative externalities is increased for those who have already been purchasing the product. Thus, by making the good more common, the image of luxury is tarnished (245). Often designer brands will establish their exclusiveness through the use of logos and unique designs. This allows consumers to be viewed as part of an “exclusive club” of those who can afford the same brand as them (Tereyağoğlu and Veeraraghavan 2167). One example of this is Ralph Lauren. Ralph Lauren brands all of their products with their logo. Consumers purchasing this brand can then easily display their purchase in order to be recognized by others (2168). This is effective because visible consumption goes hand-in-hand with the conspicuous consumption (purchasing of goods that signal wealth) of Veblen’s theory in that it is the consumption of products that signal a higher social standing (Kaus 63). In the example provided of Ralph Lauren, the visible symbol of their logo signals to consumers the financial exclusiveness in being able to purchase that brand. Simply by carrying the same brands logo, consumers associate their status with that of other consumers (Tereyağoğlu and Veeraraghavan 2168). A “reflected image” of the customer is vital for luxury brands (Kapfrere and Valette-Florence 123).  However, there are exceptions to the rule of conspicuous consumption. In fact, there are cases where more modest goods, or less clearly visible goods, are valued higher than those branded with logos (124). Typically, exclusive brands aimed at the wealthy tend to produce more expensive products that are less visible and usually void of big logos (“Demand Curve”). Examples of this are Gucci and Louis Vuitton, both are able to charge higher prices for the products which are bare of their branding logos (“Demand Curve”).

 Part of being seen as an exclusive brand is maintaining a certain level of scarcity for their products. Increasing perceived scarcity of a product is good for brands in that it allows the brand to increase perceived value of their products. This rarity can be achieved through varying quantity and distributions, as well as maintaining high pricing (Janssen 51). However, creating an exclusive brand for luxury products becomes a juggling act for big luxury brands. The idea is to grow the brand while still remaining exclusive enough to maintain being viewed as a Veblen good. This way the brand can maintain high prices (52). All big luxury brands fear the risk of becoming “too exposed” (Kaus 64). A good example of this is the formation of big luxury groups. These are groups which own multiple designer brands. The formation of luxury groups is holding a large impact on designer brands (“Beauty and the Beasts”). In the past five years, groups of luxury brands have been able to expand their market share globally from thirty-nine percent to forty-two percent (“Beauty and the Beasts”). In contrast, brands that have chosen to remain independent experienced a decrease in their market shares from fifty percent to forty-three percent. These statistics indicate that luxury brands benefit from economies of scale (“Beauty and the Beasts”). 

The problem with big luxury groups is that these groups own brands such as Guess, Michael Kors, and Kate Spade, which are now becoming over exposed. This overexposure is causing these brands to become less exclusive, and thus lose the perceived high status from purchasing these goods (“Exclusivity for Everybody”).  Michael Kors, for example, is seen in almost every department store, and most times you can find a Michael Kors product on the sales rack for under thirty dollars. In contrast, a brand like Gucci that hasn’t been so overexposed most likely wouldn’t be found on sale in a department store. However, Gucci has recently reduced the price of its least expensive handbags to less than five percent of the original price. This is supposedly part of a new strategy which also includes a reduction in opening new stores as well as more of a focus on producing leather goods (“Beauty and the Beasts”). This could indicate a turn into becoming an even more exclusive brand through limiting store fronts and thus limiting availability, as well as focusing on more quality goods. However, the reduction in pricing of certain bags could open the market to consumers with lower incomes, and thus cause increased exposure of the brand.

The internet also plays a role in the issue of overexposure. Brand manufacturers worry that the quality of the shopping experience, surroundings, and advice, which are all part of the brand image, are not always accurately presented on the internet, which effects the appeal of their products (Pruzhansky 235). Additionally, the internet allows for easy access. In most cases this is a good thing, easy access allows for a larger market to sell your products. However, for an exclusive designer brand, easy access could be detrimental, as it would tarnish the brand’s reputation as an exclusive luxury product (236). There are a few examples where the internet caused issues with an exclusive designer brand. In 2007, Yahoo experienced a security breach which allowed criminals to take over approximately 1.5 million usernames and use these usernames to sell counterfeit exclusive brands(235). Additionally, in 2008, Ebay was sued by both Hermès and a large French luxury group for selling counterfeit versions of their products (235). In both cases, the brands were essentially at risk of overexposure due to the internet.

 Hermès is an example of a brand that balances growth with maintaining exclusivity well. Hermès is the designer of the “world’s most expensive handbag,” the Birkin Bag. The typical Birkin Bag costs approximately $800 to produce, yet the least expensive version of this style bag is $7,000, and one of the most expensive Birkin Bag was sold for $300,168 (“Demand Curve”). The more shocking aspect is that Hermès could actually sell these bags for an even higher price while still being within the allowance of economic markets (“Beauty and the Beasts”). The reason Hermès is able to sell their bags at such high prices is due to the mystique behind these bags. The exclusivity of the Birkin Bag is maintained through the brand rationing their sales by queue rather than price (“Demand Curve”). In the luxury market, there is opposition to the idea of mass marketing. This is accomplished through careful distribution to very few, highly qualitative stores (Kapfere and Valette-Florence 126). Hermès avoids mass production by rationing by queue so that the bags are not produced until the order is placed for it. This system provides Hermès with a safeguard because sales will not drop even if demand for their bags does since all bags are preordered 6 months to a year ahead of time (“Demand Curve”). Rationing by queue also causes a surplus in demand for the Birkin bag, which often will overflow into other Hermès products while their customers wait for their bags (“Demand Curve”). Hermès produces about seventy-thousand bags in a year, yet prices can increase about fifty percent from the retail price on the secondary market (“Beauty and the Beasts”).  In order to purchase Hermès’ most popular items consumers must wait for up to six months, as each product is produced by a single craftsman (“Demand Curve”). This helps Hermès remain one of the most exclusive brands to this day and is a prime example of Veblen’s theory in showing that for status boosting goods demand does not decrease as price increases.

The Effects of Counterfeiting

 Counterfeiting is defined as the production of goods that imitate genuine products while passing themselves off as the actual companies’ goods (Romani Et. Al. 809). Counterfeit goods are a common occurrence in today’s society. Walking down the streets of New York City, one will encounter hundreds of booths full of venders selling counterfeit designer handbags, scarves, and sunglasses. In fact, counterfeits account for more than six-hundred billion U.S. dollars in the global market annually (Romani Et. Al. 808). This makes up for about five to seven percent of all world trade (808). The reason that the counterfeit market continues to be successful is due to the fact that the demand for well-known exclusive luxury brands continues to grow as well (Yoo and Lee 1507). The question here is whether the distribution of counterfeit goods benefit or hurt exclusive designer brands. As previously stated, mass distribution makes the good readily available, which should decrease the value of the brand for the consumer (Kapfere and Valette-Florence 125). However, by monitoring the sale of counterfeit products and imposing fines to those vendors, an exclusive designer brand may be able to profit from counterfeits through raising selling prices (Bekir, Et. Al 170). The reason these brands are able to raise the price for the genuine good when counterfeits are available is because counterfeits of a particular brand indicates that the brand is highly sought after by consumers but is unable to be purchased by a large percentage of consumers in the market (Romani Et. Al. 810). Those who are unable to purchase the original product become jealous of those who already own the original product. This envy creates a higher utility level associated with the purchase of the original product (811). In one study on counterfeit consumption within the United Kingdom, it was found that those who purchased counterfeit luxury products are more likely to purchase genuine luxury goods over consumers who have never purchased counterfeit goods, which is another benefit to the sales of exclusive brands (Bekir, Et. Al 172). This is mainly due to the theory of reasoned action, which states that future behaviors are dictated by past behaviors. In the case of counterfeits, previous purchase of a counterfeited version of a brand will often impact future purchases of the higher quality, genuine product (Yoo and Lee 1509). This stems from the consumers’ fear of declining status from lack of ownership or genuine exclusive brands (1510). Also, there will be a large utility gain if the perceived status benefit of purchasing the genuine luxury product is much higher than the perceived status boost from purchasing the counterfeit luxury product (Bekir Et. Al. 179).

Recall the different classes of consumers previously discussed. Snobs seek exclusivity and will pay the highest premiums for exclusive luxury brands, while aspirational consumers seek exclusivity but are under stricter budget constraints, so they will often resort to purchasing counterfeits to achieve an exclusive image (Bekir, Et. Al. 170). In the case of counterfeiting, the impact of aspirational consumers will offset the impact of snob consumers. In other words, because aspirational consumers desire the genuine good, but will be purchasing more counterfeits than snobs, the snobs receive a higher utility increase from buying the genuine product due to increased jealousy received by other consumers who cannot afford the genuine good. This will result in an overall increase in sales for the genuine brand, and thus increasing profit (179). An example of the benefits from counterfeiting is the Gucci bag. Genuine Gucci bags are not harmed by effects of counterfeiting as the purchase of a genuine Gucci bag increases the perceived status of the consumers of the original product (Romani Et. Al. 809). This agrees with the argument made by Veblen, that higher class people desire to differentiate themselves from those in a lower class, and thus will be willing to pay higher prices for a more exclusive product (Aronsson and Johansson-Stenman 553).

Counterfeiting is not beneficial to all designer brands. Increased brand awareness protects luxury brands from the negative effects of counterfeiting. Ironically, increased brand awareness is also what stimulates counterfeiting (Romani Et. Al. 818). However, brands who are not as well known, or not as popular amongst the “snobs” group of consumers, might see more detrimental effects from counterfeiting. If a luxury brand has lower brand popularity, the presence of counterfeits could cause consumers to favor the cheaper copies of the product. This would cause the amount of consumers who are willing to pay for the original good to decrease (810). In these cases, the genuine brand is unable to raise prices, and does not experience the positive effects discussed above. Rather, these less popular, or less valuable brands experience increased exposure which decreases their sales (Bekir, Et. Al 178). This also devalues the brand as it loses much of the snob effect and thus loses the Veblen effect their brand might have had if counterfeits were not present in the market. In order for counterfeiting to be beneficial, to an exclusive luxury brand, the impact of aspirational consumer spending must be large. In other words, the utility gain from buying genuine products must be sufficiently higher than the utility gain from purchasing a counterfeit (179). Assumingly, the more exclusive designer brands, such as Hermès, are the ones who rarely experience issues with counterfeiting.

How Various Demographics View Exclusive Brands 

 It was found that the consumption of goods to signal status and wealth, i.e. Veblen Goods, tends to be shaped by culture and economic environment (Kaus 70).  Surprisingly, lower class people tend to spend more on visible consumption compared to other consumers. Most likely, this is to combat the perceived discrimination from society for being of a lower social status (Bekir, Et. Al. 171). People in lower income groups have a higher demand for goods they perceive as status boosting because they want to appear as though they are part of the higher income groups (Kaus 64).  This is similar to our snob group of consumers who seek to distinguish themselves from other consumers by spending more money on visible exclusive goods (Bekir Et. Al. 170).  Those who live in poverty tend to develop a sense of not belonging socially with the rest of society. This is due to commonly being labeled as “inferior” to the rest of society, which results in a lower self-esteem as well. For this reason, those in poverty copy the habits of snob consumers in that they spend a large part of their income on visible consumption in order to distinguish themselves from their “inferior” label ( Kaus 65). In the same sense, developing nations tend to feel a sense of not belonging socially with the rest of the world. By purchasing brands that are seen as exclusive in the western world, or “second-hand western clothing”, consumers in developing nations, such as Africa, are able to get a sense of belonging to the rest of the world. This is because western brands are seen as a way of gaining recognition for those in developing countries (Kempen 208).  A lot of these concepts seem to stem from history, specifically medieval times. In medieval times, Aristocrats would try to distinguish themselves through dressing in flashy clothing to signal to others their wealth. This is the same idea as signaling wealth through purchasing designer brands today (209). The same idea also applies to developing countries, where the poor are willing to pay for designer labels regardless of their own economic hardships. It is even seen that consumers livening in poverty in Africa tend to spend more on visible goods than their own healthcare and even food, in order to boost their perceived social standings (205).

 In addition to poverty, race and geographic location seems to have an interesting effect on the purchase of Veblen goods as well. Different countries tend to have altered perceptions of exclusive luxury (Godey 1464). For example, Chinese consumers have a more exact definition of a luxury good, taking into account factors such as brand identity and design as well as price.  In contrast, Indian consumers tend to distinguish luxury goods solely based on price. These altered views tend to affect what visible products consumers buy in different countries and the price they are willing to spend. Indian Consumers may be more willing to pay a higher premium for a certain designer brand, while Chinese consumers may be less willing to pay that high premium if that brand does not have a strong brand identity (1465). Recall that aspirational consumers are those who desire exclusive luxury but are under strict budget constraints. These consumers typically make up about seventy percent of the consumer market (Bekir Et Al. 170). A recent study showed that Chinese lower-class women, making under five-hundred United States dollars a month, prioritize saving that money to spend on an exclusive visible good, such as a Louis Vuitton bag, so that they can be perceived as higher class (171).

 In South Africa, race typically has a large impact on conspicuous consumption habits. Historically in South Africa, having white skin is seen as a signal of higher social status by itself. To this day, white skin subconsciously signals higher wealth to others without the purchase of exclusive designer brands. For this reason, in South Africa we see that non-Caucasian races tend to spend more on visible goods to signal wealth than Caucasian people (Kaus 69). While less severe, race impacts conspicuous consumption all over the world as well. Globally, it was found that blacks and Hispanics tend to spend approximately thirty percent more on visible consumption than whites, even after controlling for income and demographic differences (63). Nationally, compared to white households with similar income levels, black households spend approximately fifty-six percent more on visible consumption, while coloured households spend approximately forty-one percent more on visible consumption (67). Education may also play a role in the purchase of Veblen goods. Those who could not afford a higher education may feel inferior to those who were able to become more educated. It was found that consumers who lacked the ability of gaining a higher education level tend to be willing to pay a higher premium on designer labels to gain status (Kemplen 222).

Conclusion

 The market for Veblen goods in the fashion world is driven byour desire as human beings to fit in with the higher social class (Aronsson and Johansson-Stenman 552). If you see that a peer recently bought a new Gucci bag, you will be more inclined to also purchase a similar bag to show that you are just as well-off as your peer, or in the same social group. This effect only works if the brand is exclusive enough to be perceived as status boosting. If a brand becomes too over exposed, they lose that appeal as an exclusive luxury product and are no longer considered a Veblen good (Pruzhansky 235). For this reason, counterfeits could be both beneficial and hurtful depending on the brand. More exclusive brands that are more sought after by snob consumers tend to be safe from negative effects of counterfeiting (Romani Et. Al. 818) . For example, a brand like Michael Kors where we tend to see their MK logo everywhere, is more likely to be hurt by counterfeiting through over exposure than say a brand like Louis Vuitton who has a more exclusive reputation. Other than counterfeiting, demographics tend to play a role in the market for Veblen goods as well. This is mainly due to the idea of fitting in with society through visible consumption (Bekir, Et. Al. 171). Overall, Veblen goods have an upward sloping demand curve because of consumers’ desire to stand out socially, or to be perceived as a higher social standing than they are realistically (“Demand Curve”). The more exclusive the product, the higher the utility the consumer gains from purchasing it relative to other consumers, and thus consumers are willing to pay premium prices for exclusive designer brands (Pruzhansky 228).

Works Cited

  • Aronsson, Thomas, and Olof Johansson-Stenman. “Veblen’s Theory of the Leisure Class Revisited: Implications for Optimal Income Taxation.” Social Choice and Welfare, vol. 41, no. 3, 2013, pp. 551–578. JSTOR, JSTOR, www.jstor.org/stable/42001419.
  • Kaus, Wolfhard. “Conspicuous Consumption and ‘Race’: Evidence from South Africa.” Journal of Development Economics, vol. 100, no. 1, 2013, pp. 63–73., doi:10.1016/j.jdeveco.2012.07.004.

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