Conspicuous Consumption Explained

We are all consumers in one way or another. And in that role, we generally try to make efficient decisions about how we spend our money. We seek a balance between quality and affordability. For example, when we go to the grocery store we look for affordable prices and good quality products, but we are not usually considering how our grocery purchases will be perceived by others or how it will alter our perceived status.

However, whenever we make a purchase in a direct effort to raise our status in the eyes of others, we are engaged in something called conspicuous consumption. Considering the large role status plays in our society, it’s no surprise that conspicuous consumption is a large part of our economy.

Conspicuous Consumption is a term coined by American economist Thorstein Veblen in his 1899 book The Theory of the Leisure Class. As a result of Veblen’s work, goods purchased to raise perceived status are now described as Veblen Goods.

Conspicuous Consumption is basically showing off

The iPhone is considered by some to be a Veblen Good.  The iPhone is generally more expensive than other phones which have the same features and functionality. However, for many people owning an iPhone is an essential part of crafting the image they wish to project to others. So, if an iPhone is purchased in an attempt to impress others and increase status, it could be considered conspicuous consumption.

Veblen Goods: As price goes up, demand can go up as well

When a price increases, demand usually decreases. Veblen Goods are different. Because they are purchased in an attempt to increase status, a higher price can actually lead to increased demand. Since a higher price can signal higher value, people want to show off their purchase. In this way, both Veblen Goods and conspicuous consumption contradict the usual workings of the economy, where lower prices generally lead to increased demand.

A Rolls Royce is a great example of a Veblen Good: If they cost $20,000 each they would not be seen as unattainable and valuable, and they would not be purchased by the wealthy. Thus, lower prices could reduce demand for Rolls Royce vehicles. It is the very fact that Rolls Royce automobiles are so expensive that makes them a rare and luxurious item. To drive a Rolls Royce is to signal wealth and high status.

Of course, there must usually be some real quality behind the product for a higher price to increase demand. If Ford doubled the prices of all their cars they wouldn’t be seen as a luxury brand, they would just suffer a collapse in sales.

While Thorstein Veblen viewed conspicuous consumption negatively – seeing it as wasteful – it’s going to be an influential driver of our economy for as long as human beings like showing off. In other words, it’s here to stay.

Follow Spencer Fernando on Twitter: @SpencerFernando

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