Part One: Conspicuous Consumption and Consumption as Social Signalling

Coined by sociologist Thorstein Veblen in his 1899 book The Theory of the Leisure Class, conspicuous consumption is the act of buying luxury goods to publicly show off wealth and social status rather than to get direct functional utility.

Veblen found that elite consumers rated commodities in terms of two different elements of their utility functions. The first is direct consumption benefit or the practical use of the item and the second is positional utility or the consumer’s relative standing in the social hierarchy. A costly possession like a luxury watch or a designer jacket is a conspicuous sign of monetary power and freedom from work. For this to work, consumption has to be highly visible because private ownership does not give the required reputational returns in the context of asymmetric information.

In modern economic parlance, this behaviour is a form of status signaling where market participants use very expensive, observable expenditures to credibly signal their wealth. For these signals to be credible, they must be prohibitive enough financially to deter lower income agents from mimicking them. If the premium brand were to reduce its market price significantly, the signaling capacity of the underlying commodity (and, hence, of the premium brand) would be lost. For this reason, luxury firms deliberately enforce artificial scarcity and high prices in order to preserve the symbolic utility of their brand equity.

Veblen created this framework over a century ago, but the digital age has magnified these dynamics enormously. Today’s social media platforms offer highly scalable infrastructures for the consumption of reputation, greatly enhancing the visibility and global scale of status competition.

Part Two: The Veblen Good and Demand Nonmonotonicity

The end result of this analysis is a Veblen good . A Veblen good is a luxury good whose demand increases as its price increases . This phenomenon directly defies the traditional law of demand, which assumes that higher prices always cause consumers to buy less.

In classical economic theory, when prices increase, consumers reduce their consumption because their budgets are squeezed and they can find cheaper substitutes. Veblen goods are different, though, in that a higher price makes the item even more desirable, as it increases the prestige and the signaling power of the item. In this framework price doesn’t just ration out who can buy the item, it becomes a direct part of the level of satisfaction the consumer gets from possession.

Let's say you have two handbags that look the same, but one costs $200 and the other $2,000. The difference in material quality is negligible from a purely practical point of view. But for status-conscious consumers, the more expensive handbag has far more symbolic weight because its high price tag signifies exclusivity, economic power and limited access. The social meaning of the object is attached to its retail price, which makes the high price itself an obvious marker of rarity and elite status.

This results in what economists refer to as prestige-seeking behavior. It moves the normal demand curve so that at some high-end price levels a price increase causes an increase in demand. The product becomes more desirable because it is expensive and out of reach for most of the people.

This phenomenon is very visible today in luxury brands such as Hermès, Louis Vuitton and Ferrari. These companies employ planned scarcity, controlled supply, and high pricing strategies in order to safeguard exclusivity. In these markets, consumer behaviour is less driven by practical need and more by social emulation, status competition and the desire to stand out in a stratified society.

R E F E R E N C E S

1. Veblen, Thorstein. The Theory of the Leisure Class: An Economic Study of Institutions. Macmillan, 1899.
2. Leibenstein, Harvey. "Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand." Quarterly Journal of Economics, vol. 64, no. 2, 1950, pp. 183–207.
3. Bagwell, Laurie Simon, and B. Douglas Bernheim. "Veblen Effects in a Theory of Conspicuous Consumption." American Economic Review, vol. 86, no. 3, 1996, pp. 349–373.
4. Spence, Michael. "Job Market Signaling." Quarterly Journal of Economics, vol. 87, no. 3, 1973, pp. 355–374.
5. Kapferer, Jean-Noël, and Vincent Bastien. The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands. Kogan Page, 2009.
6. Eckhardt, Giana M., et al. "The Reign of Relatability: Social Media and the Transformation of Conspicuous Consumption." Journal of Marketing, vol. 85, no. 1, 2021.