Nova workboard

a blog from young economists at Nova SBE

Can we really buy that?

The Law of Demand states that “if the demand for a good increase when income increases, then the demand for that good must decrease when its price increases” [1].

Although this fundamental law is a robust law for most goods it falls short to explain some luxury goods, for each when price increases demand increases. Such a good is called Veblen good. This relationship between price and demand makes the demand curve to slope the reverse way from a normal good. It’s even possible to find some Veblen goods that under a certain price level behave like a normal good. However once their prices go up the demand curve slope changes, making the demand for this good behave as one described as Veblen goods.

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An excellent example of this behavior, described in the chart above, is the Lacoste case in the 80s. Their product was cheap and abundant, having a demand as depicted under P1, therefore a normal good. The company changed the vision consumers had over their product by setting higher prices, as well as reducing production, making their product that was once a normal good, a luxury good [2]. Consequently, shifting the slope of the demand curve, as depicted over P1. This behavior of demand can be explained, for instance, due to the fact that satisfaction derives not from the utilitarian attributes. This phenomenon maybe explained by the audience reaction to the wealth displayed by the purchaser. [3] Furthermore consumers will be willing to pay a higher price then they would for a functionally equivalent good.[4]

Some argue that this approach is too restrictive and lacks generality, once it explains consumption only through the perspective of the top of social hierarchy. Additionally, that consumers do not display wealth conspicuously but in other manners and their behavior is no longer shaped by positions of social class but by lifestyles that cut across the social hierarchy.[5] Despite all the criticism around Veblen’s work it was, and still is, an important contribute to more complete knowledge of consumers choice. Most of all, gave us the chance to consider consumers choice not only as a utility maximization process but as a process that can be influence by society.

For instance, consider the iphone-n, a good that we can classify as a smartphone, whatever is his n. A product that, no doubt, has a desirable design, it comes with the latest technology — powerful processors, advanced graphics, and fast memory. But are those the reasons why we as consumers buy it? Although, it has great characteristics, I would say no matter the technology inputs, the new apps or features, an iphone will always arouse the consumers’ interest. In my view, when consumers buy this good they don’t only buy the product, and utility that they derive from it, but the image that comes along. The ownership of this product is a display of prosperity, a social status affirmation.  Thus, consumers don’t buy this good only with the purpose of utility maximization but simultaneous to achieve a certain social status by signaling wealth through conspicuous consumption.  Furthermore, I consider safe to state that we can observe a bandwagon effect in the consumption of this good. Consumers buy it partially due to a trend, a general willing to buy a given good that allows one to be identified as a member of a certain class, or group.

This phenomenon is possibly clearer when we consider a country with big asymmetries in income distribution. A country where only rich consumers are able to afford goods with high prices. The same goods that have prohibitive prices for poor consumers, due to their extremely low income. I believe that the purchase of an iphone, in this situation, correspond not only to a maximization process, but also as a way to signal a certain position within that society. It allows consumers to distinguish themselves from another group or class that won’t be able to purchase the same good due to budget constraints.

After all, the question we should ask is if Apple releases tomorrow iphone-n with unknown features, and therefore unknown utility, what would be the demand for this good?

[1] – Hal. R. Varian – Intermediate Microeconomics

[2] – http://www.economist.com/blogs/freeexchange/2007/07/giffen_v_luxury_goods_discuss

[3] – Roger Mason – Modeling the demand for Status goods – 1992

[4] – Laurie S. Bagwell and B. Douglas Bernheim – Veblen Effects in a Theory of Conspicuous Consumption – 1996

[5] – Andrew B. Trigg – Veblen, Bourdieu and Conspicuous consumption – 2001

 

 Tiago Branco

#664

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Author: studentnovasbe

Master student in Nova Sbe

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