The Veblen effect is named after American economist Thorstein Veblen, who wrote about Conspicuous (which means visible) consumption; it means spending of money on luxury goods and services to display financial power to the public. In the 19th century, the term conspicuous consumption introduced by Veblen in his book “The theory of leisure class: an Economic Study in the Evolution of Institutions.” Conspicuous consumptions occur by men, women, and families of the upper class who show off their great wealth as a means to manifest their social power and prestige either real or seeming. Veblen wanted to site the relationship between the economy, society, and culture.

Conspicuousness was in existence since ages. In 75 BCE a band of Cilician pirates in the Aegean Sea captured Julius Caesar; the capture was a minor inconvenience for Caesar but he took the chance to prove his worthiness. From the start, Caesar simply refused to behave like a captive. When the pirates told him that they had set his ransom at the sum of 20 talents (approx 620 kg of silver), he mocked at them for not knowing whom they had captured and suggested that 50 talents (1550 kg of silver) would be a more appropriate amount. He then sent his followers out to gather the money and settled in for a period of captivity. The pirates were dumbfounded. It’s rare that a hostage negotiates his ransom up. The task took 38 days, once he was freed, Caesar managed to quickly raise a small fleet which he took back to the island where he had been held captive. He captured and killed them and took back his 50 talents of silver, along with all their possessions. Thus, in 75 BCE Caser created a Veblen effect.

Perhaps the most powerful psychological flaw exists among investors is the bandwagon effect, where people alter their behaviour to fit in with the crowd. This can lead to groupthink where the market effectively becomes one person rather than a group of individuals. Brands such as Carter, Rolls-Royce, Aston Martin, Harrods, Champagne, Christian Dior and Louis Vuitton etc are perceived to be worth more, simply because they cost more. They are not actually any better than their counterpart goods in their category. Their price alone makes them desirable. The most obvious paradox concerns function. Luxury goods are clearly not purchased to satisfy so-called primary needs such as clothing, hunger, thirst, shelter or transport. Their function is psychological – they promote a sense of being financially powerful and they serve as markers of a real or projected status in society.

The function of luxury goods is largely a derivative of their price. The retail price at which most luxury goods are sold can contradict classic economic theory as demand, instead of increasing with a decrease in price, it follows the opposite curve. A bottle of perfume that costs 85 Euros can be more attractive to a purchaser than a bottle costing 20 Euros, although intrinsic differences might be insignificant. But the demand curve does not increase indefinitely with price and once a certain threshold has been reached, demand will drop or fall away completely, but the propensity to purchase goods and services on account of the higher rather than lower price differential compared to average prices in a generic category is undoubtedly one of the principle characteristics of the luxury domain.

As society, we are so obsessed with how the rich people live their conspicuous lives. I think it has more to do with psychology than sociology. When we think about ourselves, we swiftly fall back on class stereotypes: HIG (High Income Group), MIG (Middle Income Group) and LIG (Low Income Group). To the conspicuous consumer, a public display of wealth and power is a means either of attaining or of maintaining a given social status. Flashy people in society use such behavior to maintain or gain higher social status. Flashiness as a behavior is deeply entrenched in culture of our society. It is extremely important to recognize the way in which conspicuous consumption directs our spending habits, and our consumption pattern.

There is also a ‘Counter-Veblen Effect’, where people believe they will be admired for buying bargains or for being prudent in their purchases. This can be seen where people boast about how little they paid for a normally expensive item. It can also be a motivator for buying in sales and low-cost outlets. A lot of research has been conducted to study cases of goods which show interface effects, and in which people seem to receive more pleasure from more expensive goods.

Perception of quality: In Veblen’s analysis of conspicuous consumption, the economist noted that for certain luxury goods and services, a higher price was often associated with the perception of higher quality. Therefore, a price increase was seen as evidence of the producer improving quality.

Positional goods: The quantity demanded of a positional good depends on how the good is distributed in society. Veblen goods often exhibit a negative positional effect, i.e., the quantity demanded of Veblen good increases with a reduction in the distribution of the good. It occurs because the utility gained by a consumer from holding such a good arises purely from the fact that few other consumers hold it. High levels of conspicuous consumption are seen as socially undesirable. Because high levels of conspicuous consumption may be an indicator of high levels of income inequality. And, secondly, utility provided by the goods is alleged high quality, which may not be true.

Conspicuous (which means visible) consumption is the spending of money on luxury goods and services to display financial power to the public. In the 19th century, the term conspicuous consumption was introduced by the economist and sociologist Thorstein Veblen in his book “The theory of leisure class: An Economic Study in the Evolution of Institutions.” In that 19th-century social and historical context, the term “conspicuous consumption” was used to describe the men, women, and families of the upper class who showed off their great wealth as a means of publicly manifesting their social power and prestige either real or seeming.

As society, we are so obsessed with social class. I think it has more to do with psychology than sociology. When we think about ourselves as a people, we swiftly fall back on class stereotypes: HIG (High Income Group), MIG (Middle Income Group) and LIG (Low Income Group). Also, we are so attracted to the way the rich and famous lead their lives, that subconsciously we follow literary classics, great movies and drama, television shows etc. To the conspicuous consumer, a public display of wealth and power is a means either of attaining or of maintaining a given social status. Flashy people in society use such behavior to maintain or gain higher social status. Most classes have a flashy consumers who affect and influence the others in those classes. The lavish consumption of goods is meant to provoke the envy of other people. The term conspicuous compassion is used to describe the deliberate charitable donations of money in order to enhance the social stature of the donor. It is a display of superior socio-economic status. Flashiness as a behavior is deeply entrenched in culture the society. It is extremely important to recognize the way in which conspicuous consumption directs our spending habits, and our consumption pattern.

Conspicuous consumption is swelling the luxury markets across the world. The number of luxury goods and services buyers in the developed world is being swelled by two other trends. First, consumers are increasingly adopting a “trading up, trading down” shopping strategy. Many traditional mid-market shoppers are abandoning middle-of-the-range products for a mix of lots of extremely cheap goods and a few genuine luxuries that they would once have thought out of their price league. Alongside this “selective extravagance” is the growth of “fractional ownership”: time-shares in luxury goods and services formerly available only to those paying full price. Fractional ownership first got noticed when firms such as NetJets started selling access to private jets. It has since spread to luxury resorts, fast cars and much more.

Robust sales of luxury cars and fine art and artifacts have helped push the global luxury goods market higher than €1tn (£700bn), according to a new report, despite slowing demand for personal luxuries such as jewellery and handbags. The annual report from consultancy Bain & Co. Chinese consumers account for 31% of global luxury sales, followed by US consumers at 24% and Europeans at 18%.

The Indian economy continued to perform well in 2015 and Indian luxury goods was able to post strong growth. The market is still in a nascent stage and has many opportunities for growth amongst international players. The urban rich consumer base of India is indulging highly in luxury goods for both style and prominence reasons. Apart from the economic and demographic factors, during 2015 luxury players invested in marketing campaigns to increase the awareness of luxury goods among local consumers.  A study stated that with the increasing brand awareness and growing purchasing power of the upper class in tier II and III cities, Indian luxury market is expected to cross $18.3 billion by 2016 from $14.7 billion in 2015; it is growing at a compounded annual growth rate (CAGR) of about 25%.

The factors that have fuelled the luxury industry’s growth are rising disposable incomes, brand awareness amongst the youth and purchasing power of the upper class in Tier II & III cities in India. Areas such as five star hotels and fine-dining, electronic gadgets, luxury personal care, and jewelry performed well in the year of 2015 and are expected to grow by 30-35% over the next three years. Big ticket spends such as on luxury cars mainly SUVs are likely to continue, growing upwards of 18-20% over the next three years, driven by consumption in smaller towns and cities.

A recent research also suggests that the luxury sector is swelling in apparel and accessories, pens, home decor, watches, wines and spirits and jewellery, services such as spas, concierge service, travel & tourism, fine dining and hotels and assets, yachts, fine art, automobiles. According to the study, the high internet penetration across tier-II and tier-III cities along with high disposable income shall lead to approximately 100 million transactions on the Internet by 2020. As a result, the luxury consumption is going to increase manifold in the country.

In the book “Income, Saving and the Theory of Consumer Behavior” (1949), J.S. Duesenberry proposed that a person’s conspicuous consumption psychologically depends not only upon the actual level of spending, but also depends upon the degree of his or her spending, as compared with and to the spending of other people. The conspicuous consumer is motivated by the importance he/she gets and society’s opinion about them. The status and the opinion of the social and economic reference groups are very important for conspicuous consumers.

Over-sized houses aids other forms of conspicuous consumption: such as an over-sized garage for the family’s over-sized motor vehicles, buying more clothing to fill larger clothes closets etc. hence, conspicuous consumption becomes a self-generating cycle of spending money for the sake of social prestige. Similar to the consumer trend for over-sized houses is the drift towards buying over-sized light-trucks, specifically the off-road sport utility vehicles as a form of psychologically comforting conspicuous consumption, because such big motor-vehicles usually are bought by people who reside in a city, an urban nuclear family.

High levels of conspicuous consumption may be seen as socially undesirable on two grounds; firstly, as it is often associated with high relative income, high levels of conspicuous consumption may be an indicator of high levels of income inequality, which may be found intrinsically or instrumentally objectionable; secondly conspicuous consumption differs from other forms of consumption in that the main reason for the purchase of positional goods is not due to the additional direct utility provided by the goods alleged high quality, but rather the social status associated with the consumption of that good.

So, is conspicuous consumption good or bad? The fact is that it stimulates economic growth. Because people spend their discretionary income, it increases the likelihood that the working class will be able to make more money. When you buy a product, the company you are buying from makes money. When they make money, they can afford to hire more workers. They can also then afford to pay their workers higher wages. When the workers get higher wages, they can afford a reasonable living standard, if they work two jobs or more, quit one, leaving it open for someone else who is unemployed. They also could afford to consume a bit more than the bare necessities and buy more products, further stimulating the business. This is an infinity symbol of transfer of wealth. The money keeps traveling than remaining stagnant. More millionaires in the society will spend more money which will stimulate markets, jobs, and boost the economy. Also economies grow because of luxury tax applied to goods and services for conspicuous consumption. It is a type of progressive sales tax that at least partially corrects the negative externality associated with the conspicuous consumption of luxury goods.