What it is:
A Veblen good is a good or service whose demand increases when its price increases. The economist Thorstein Veblen.is named after
How it works (Example):
Many luxury goods are Veblen goods. That is, the more expensive they are, the more people want them. Veblen goods contradict the basic economic laws of supply and demand, which say that the lower a good's price, the more peopledemand it.
For example, let's consider the XYZ purse. Handmade in Italy, the purses cost $17,000 and are often seen on the arms of celebrities. They have a distinctivebottom, which is trademarked, and so everyone who sees the purse knows it's an XYZ and was therefore very expensive. The buyers of these purses believe that the cost of the purse conveys a positive message about themselves to the public and creates the perception of having "status." Accordingly, more people want the purses because they are so expensive (rather than because they are of a certain quality).
Now let's assume that XYZ red bottom for as little as $100, so the XYZ brand is less special. Demand drops considerably.
Why it Matters:
Veblen goods are the manifestation of conspicuous consumption. Accordingly, when the price of a Veblen good goes down, demand drops because the good is no longer "special."
In finance, recognizing which companies make Veblen goods is important and means that investors must pay special attention to the company's pricing policies.