The Veblen Effect: The economist Thorstein Veblen, after whom the Veblen effect was named, described this kind of purchase behaviour in his theory of conspicuous consumption “The theory of the Leisure Class.’Weblen (1899) used the term conspicuous consumption to describe the consumer characteristic of a new class of wealthy consumers that emerged in the 19th century. The concept of conspicuous consumption describes the elaborate spending on goods and services that are purchased only for their fulfillment of psychological expectations and emotional needs. Consumers buy these Veblen goods to display their wealth, status and superiority to society (Wood, John C., 1993). Conspicuous consumption is also described as being status-seeking consumption. The Veblen effect tries to explain the demand for status goods in economics (exceptions to the Law of Demand).
Leibenstein (1950) Suggested Three Types of Effects based on the Demand for Products: the bandwagon effect, snob effect, and Veblen effect. All these three effects can be differentiated based on the desire to consume (not to consume) certain products or brands.
The Snob Effect: this effect explains the preference for status goods because they are exclusive and not easily obtained. In other words, consumers buy an item because of its high quality and scarcity value. The snob effect reflects the desire of consumers to be exclusive and states that the scarcity of a product stimulates its demand. The “snob effect” contrasts most other microeconomic models, in that the demand curve can have a positive slope, rather than the typical negatively sloped demand curve of normal goods (Business Dictionary). On the other hand, snob purchases of any product will decrease as other consumers increase their consumption of that particular product. These goods usually have a high economic value, but low practical value. The less of an item available, the higher its snob value. Examples of such items with general snob value are rare works of art, designer clothing, and cars. Collectors within a specific field can suffer from snob effect, searching for the rarest and often most expensive collectibles. Such examples are classic automobiles, stamps and coins. The desired effect can often be achieved by purchasing a less-expensive version from a reputable brand.
The Snob Effect: preference for goods because they are different from those commonly preferred; in other words, for consumers who want to use exclusive products, price is quality.
The Bandwagon Effect: this effect explains the demand for status goods by stating that people purchase goods and services in order to be identified with a particular social group by adopting identical or similar patterns of consumption. This theory represents the desire of people to belong to a group and in this respect contrast most with snob effects (Roger Mason, 1992). This effect is noticed and followed very much by youth, where for instance if people see many of their friends buying a particular phone, they could become more interested in buying that product (Nadeau, Richard; Cloutier, Edouard; Guay, J.-H., 1993). When individuals make rational choices based on the information they receive from others, economists have proposed that information can quickly form in which people decide to ignore their personal information signals and follow the behavior of others. Bandwagon effect describes interactions of demand and preference. The bandwagon effect arises when people’s preference for a commodity increases as the number of people buying it increases (Gisser, Misch; McClure, James; Okten, Giray; Santoni, Gary ,2009). This interaction potentially disturbs the normal results of the theory of supply and demand, which assumes that consumers make buying decisions solely based on price and their own personal preference. Gary Becker has even argued that the bandwagon effect could be so strong as to make the demand curve slope upward (Becker, Gary S., 1974).
The bandwagon effect: preference for a good increases as the number of people buying them increases.
The Giffen goods: is one for which observed demand rises as price rises, but the effect arises without any interaction between price and preference. It results from the interplay of the income effect and the substitution effect of a change in price.
The theory of consumer demand suggested that consumers desire goods in order to either conform to their peer group or maintain their exclusiveness from rest others (Amaldoss & Jain, 2005; Brewer, 1991). The literature on consumer demand for goods or products specified consumers’ attempt to be ‘in style’, indicating their inclination toward conspicuous consumption (Brewer, 1991). According Leibenstein (1950), “Bandwagon, snob, and Veblen effects in theory of consumer demand,” he classified consumer demand for commodities into functional and non-functional demands. Functional demands represent the existence of demand due to the inherent qualities of commodities, whereas non-functional demands represent demand rising due to factors other than the qualities and inherent characteristics of commodities. This differentiation is rooted in Veblen’s (1899) initial work on the conspicuous consumption of luxury products. His point was well supported by Leibenstein (1950) who highlighted the non-functional motivations (factors other than quality of products) for consumption of products.
Ross, Bierbrauer, and Hoffman (1976) pointed out that consumers consume luxury products due to the bandwagon effect in order to conform to others who also consume those products. Amaldoss and Jain (2005) made a contradicting argument that consumers who purchase luxury brands demonstrate their need to be unique from others, reflecting the snob effect. On the contrary, the conceptualization of snob effect by Leibenstein (1950) pointed out that if the demand for goods increases, then individuals with snob effect may not want to consumer those goods. Individuals with snob effect value luxury brands less if their demand is high in the market (Amaldoss & Jain, 2005). Thus, consumers who adhere to the snob effect may not be interested in counterfeit brands due to lower uniqueness associated with these brands. On the contrary, consumers who believe in bandwagon effect may like to purchase a counterfeit version of a famous luxury brand since they want to be similar to their peers or social groups.
Despite recent global economic downturns starting from 2008, luxury goods have maintained their popularity as some of the most popular products in the world, while the sales of other goods have fallen significantly. Recent developments on the luxury market have created a different competitive setting on the luxury goods market.
As a result of diversification strategies of several luxury goods brands, most of them have extended to more accessible luxury products (Seung Yoon Rhee, 2012). The demand side has changed substantially. The traditional luxury consumer, called the “leisure class” by Thorstein Veblen, does no longer just consist of the super rich and aristocracy.
Due to the globalization of the world economy and the growing wealth, the leisure class has been joined by the newly rich and occasional customers from the middle class, which now also are part of the luxury consumer base. Furthermore, the traditional geographical markets for the luxury goods industry have changed because of the increasing demand for luxury goods products from other countries. These fundamental changes in the luxury environment have challenged the luxury goods houses and the ability to establish a competitive advantage (Donald R. Lehman and Russell S. Winer, 2005). The innovation and cooperation are most commonly used to create competitive advantage on the luxury goods market.