Veblen goods and the psychotic drive for exclusivity

Most things we use – pens, cell phones, cars, bikes, house, and a quadrillion other items that make up our “stuff” (oh, and speaking of stuff, this immortal George Carlin video shouldn’t be ignored, by anyone), follow that seemingly unquestionable law of supply and demand and the price based on it. It’s simple: Supply is high and demand is low, price shoots up; supply is low and demand is high, price crashes down. It’s all high school economics, and if you haven’t been to high school, commonsense would be a good alternative to have thought about it with. A cell phone costs Rs. 10,000 and sells 10,000 pieces a day, and going by the law of supply and demand (LSD – a perfect acronym, hah!), if you cut down the price by Rs. 1000, the sales increase to 11000 pieces a day (only an example, dude). There is sufficient evidence taken directly from the market over the last century and a half in support of LSD to make it a law as commonplace and to-be-taken-on-face-value as the law of gravity in physics or the law of Brownian motion in chemistry. And if something is so consistently evidenced by reality and over such a long time, no one could or should be bold enough to question the law, right?

Wrong. Thorstein Veblen was. An economist – a true economist, i.e., not a wannabe economist like Steven Levitt, author of Freak-on-comics, whose goal is not to explore reality but to overturn conventional wisdom, even if it works – and a sociologist, Veblen was a dispassionate observer of societies and the behavior of people under various economic conditions. Among is immense contributions to the field of economics is an observation that is as important to understanding market economics as the LSD, and, as I might have hinted till now, it runs counter to the LSD. Veblen proposed the idea that certain goods will disobey the LSD and yield ironic results if you do what is generally acceptable for goods that do obey the LSD: if you cut down the price, then contrary to the expectations of demand rising up and hence the product selling more, it starts to sell less and becomes less preferred in the market. The very reason they sell more is because of, not in spite of, their high price. Sounds weird? Even if it doesn’t sound weird, it is weird. Here’s how it works, sort of.

Humans have a very strong desire for exclusivity. We want to own things that few other people do, or better yet, only we do. We sometimes go to great lengths to possess it; the desire for the first place in a race, even if the race itself carries no meaning or purpose, the desire to own luxury cars, unmatched racer bikes, diamonds, designer edition clothes and shoes, watches made of 24 carat gold, spoons and forks made of gold… Owning any of these changes our image in the society or at least amongst acquaintances, and with the exclusivity their possession brings to us, we set ourselves, if only virtually, above all those who lack them. Despite the fact that there is nothing inherent to the quality of the product or the product itself that would justify its price, its very exclusivity sets a high price. In other words, the product becomes a status symbol. In some more words, the high price it is tagged is not for its quality but for its exclusivity.

Price drives exclusivity, and exclusivity drives (pseudo)status. Then status drives exclusivity back again, and it enters a self-feeding spiral.

Cutting down the price makes it more affordable to a section of the market that is larger than the pre-price-cut section. And with that, exclusivity of the product is also cut down to a certain degree. You might think how would making something more affordable to a larger group of people result in its selling less, but as pointed out, because of the drop in its exclusivity, there follows a drop in the market preference for the product, and since there is nothing inherent about the quality of the product that would justify the freakishly high price, the demand doesn’t go up to counterbalance the drop in preference that ensues the price cut. As a result, the demand curve has nowhere else to go but down.

Rolls Royce recently released its latest engineering marvel called Ghost. Its price was set at Rs. 2.3 crores. There were 25 bookings for the car in Delhi. Technically speaking, there is nothing about Ghost that is not already present in Mercedes Benz. They are both equally advanced, and advanced they both are enough to justify a price that is around what Benz has to offer. But Rolls Royce set its price more than five times what the same technology is on offer with Benz, making it a lot more expensive and hence much more exclusive than any Benz model to date. And the 25 status-conscious pricks needed just that!

Here are some more Veblen goods with which a high superficial social status is attached, mostly because of the high price and partly because of the good quality. All these products were featured in the Forbes annual special edition called “Luxury Must-Haves for Every CEO”. The title itself suggests an irrational desire to separate the CEO from the rest of the working class.

Vertu Signature. A cell phone. Cost: Rs. 6.46 lakh
Amosu Blackberry Curva. A cell phone. Cost: Rs. 95 lakh
Piaget Polo FortyFive. A watch. Cost: Rs. 9.0 lakh
Audemars Piguest Royal Oak Offshore Chronograph. A watch. Cost: 14 lakh
Panerai Radiomir Tourbilln. A watch. Cost: 61.87 lakh
Mont Blanc Mahatma Gandhi 241. A pen. Cost: Rs. 11.39 lakh
Luciano Barbera. Men’s suit. Cost: Starting at Rs. 2 lakh
Ermenegildo Zegna 14 Micron Couture Suit. Men’s suit. Cost: Rs. 2.48 lakh
Brioni MTM suits. Men’s suit. Starting at Rs. 3 lakh, up to Rs. 35 lakh

There are many more. Google them for pictures/info. There is a sentence in the description of Luciano Barbera, and I quote without paraphrasing: “This is as exclusive as it gets.”



Rolls Royce Ghost

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