[Not So] Basic Economics

People are weird. It really boils down to that.  And I’m not excluding myself from that categorization at all.  All people are weird.  Need proof? Veblen goods are proof.  A Veblen good is a good where demand rises as price rises. See?! Weird. 

But, it turns out that people are weird in a somewhat predictable way on this one.  Often, this increased demand is because people feel its higher price reflects greater quality or greater status.  That means that this concept is usually attached to luxury goods or “prestige” brands.  Let’s remember those pair of Christian Louboutin heels from a few weeks ago.  You can buy high heels at almost any price point.  Are these black pumps at $695 that much better than these for $20?  The theory of Veblen goods would say that many consumers would think so.  They might think the Christian Louboutin heels have higher quality and will last longer than the summer, but those buying Christian Louboutin heels are even more likely to care that they (and maybe even you) know they bought the high end shoes rather than the Amazon specials.  Thorstein Veblen, an American economist posited in his book, The Theory of the Leisure Class in 1899, that wealthy individuals purchased some luxury goods because of, not in spite of, their high price because they wanted to show off their status and excess.

However, I don’t think it is only about status and showing off as many of Mr. Veblen and many other articles state.  I think it happens on the lower end, too.  If you offer me a hot dog for 25 cents, I might wonder what exactly is in that hot dog.  I may not wonder as much at a dollar. I’d probably start wondering again at ten dollars.  That better be one good hot dog!  But I’d be much more likely to buy that dollar dog than the quarter dog.  There is no flaunting of my status from the price jump from 25 cents to a dollar, but I am definitely making quality judgments based on price that may or may not be justified.  Same if I am ordering wine at a restaurant.  If I am just with my husband, I probably am not going to order the cheapest wine on the menu because I think that is likely the least good wine.  Now, if across the table is someone that I am trying to impress, I may go even further up the price list to impute some status.  Restaurants know this, so some increase the price to capture that Veblen good magic. 

So what does this all mean other than proof of my hypothesis that people are weird?  Well, first, it means buyer beware.  Just because it is expensive, it doesn’t mean it is good.  But also, what if your product is being impacted by this thinking?  Are you actually underpricing yourself?  People are making value judgments based on your price.  You need to live up to the price you set, but also not let them decide you are less than what you are!  Jeez, and here we thought just look at our COGS and be done with it.  But, nope, people are weird.

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