Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Higher Prices Can Increase Demand
Transcript
- Lucas: So here's a puzzle: you're a watchmaker. You sell a steel sports watch for eight thousand dollars. Sales are fine. You decide to raise the price to ten thousand dollars — what happens? Luna: If I'm thinking like a normal economics textbook, I'd say demand drops. Higher price, fewer buyers. Lucas: Right. Except that's not what happened. In 2024, a major Swiss watch brand — let's call it a well-known name — increased prices on several models by roughly 25 percent. And their sales went up. Waitlist times got longer. The secondary market prices actually climbed too. Luna: That flies in the face of the whole demand curve. But it's a classic — the Veblen effect. Lucas: Exactly. Named after economist Thorstein Veblen, who wrote about 'conspicuous consumption' back in 1899. The idea that for certain goods — luxury goods, status symbols — the utility you get comes partly from the price itself. A high price signals exclusivity. It signals that you can afford it. So raising the price actually makes the product more attractive to the target customer. Luna: And the watch example is perfect because it's a visible, durable good. You wear it on your wrist. Everyone can see it. If the price is higher, the signal is stronger. Lucas: Yeah. And if walking through that logic with us has made something click, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. No pressure, just a way to keep this thing ad-free and going. Luna: It does make you think about how many decisions are driven by signaling rather than utility. But let's dig into the Veblen effect more — what separates a Veblen good from a normal luxury item? Lucas: Great question. A normal luxury item, like a high-end leather handbag, might have some status appeal, but its demand still follows the basic law of demand — price goes up, quantity demanded goes down, all else equal. A Veblen good is special because the demand curve can actually slope upward over a certain range. Higher price leads to higher quantity demanded. Luna: So the price itself becomes part of the product's value. You're not just buying the watch; you're buying the fact that it costs ten thousand dollars. Lucas: Precisely. There's even a term for it: 'the snob effect.' The desire to own something that few others can afford. When the price rises, fewer people can buy it, which increases its exclusivity, which makes it more desirable to the wealthy. It's a self-reinforcing loop. Luna: Is that always sustainable? At some point, doesn't the price become so high that even the wealthy balk? Lucas: It can hit a ceiling. But for brands like Hermès or Ferrari, they've managed to stay in that sweet spot for decades. Part of it is controlling supply — deliberately producing fewer units than demand would justify. That scarcity, combined with the high price, keeps the Veblen effect humming. Luna: And there's a flip side too — the 'bandwagon effect,' where people want something because everyone else has it. That's more about mass adoption than exclusivity. Lucas: Right. Veblen goods rely on the opposite: the fewer people who have it, the better. So marketers have to be careful not to overdistribute. If a Rolex becomes too common on Instagram, its status might drop. They have to maintain that aura of rarity. Luna: Let's talk about a concrete example — the automotive industry. High-end car brands sometimes raise prices and see demand increase. Lucas: Sure. Consider the Porsche 911. Over the past decade, Porsche has steadily increased the base price of the 911, often outpacing inflation. Yet demand has remained incredibly strong, with order books full months in advance. Part of that is product quality, but part is the Veblen effect. A higher price reinforces the perception of the 911 as an aspirational, exclusive sports car. Luna: And when they release a special edition that costs significantly more, it often sells out instantly. Lucas: Exactly. The limited edition itself becomes a Veblen good within the Veblen good. The price is so high that it effectively screens for the ultra-wealthy. And those buyers derive status from owning something that almost nobody else can get. Luna: It's interesting to think about how this applies to services too. Like, top-tier consulting firms or private schools — do they use pricing to signal quality? Lucas: They absolutely do. In fact, a lot of MBA programs have raised tuition aggressively, partly to maintain a perception of exclusivity. If tuition were too low, the degree might be seen as less prestigious. But there's a limit — you can't price yourself out of the market entirely. The Veblen effect works best when the product is visible and status-relevant. Luna: What about digital goods? Like a subscription to a premium newsletter or a piece of art in the form of an NFT? Lucas: Digital goods are tricky because they're often non-rival — one person's consumption doesn't reduce availability. But for NFTs, the price itself was often the main source of value. Buyers paid millions for a JPEG because it signaled they were part of an exclusive club. That's pure Veblen, at least until the market crashed. Luna: So the Veblen effect is real, but it depends on context. If a product isn't visible or doesn't confer status, raising the price just hurts sales. Lucas: Exactly. You can't charge $10,000 for a toaster and expect the Veblen effect to kick in. The toaster is a functional appliance, it sits on your counter, maybe no one sees it. The status signaling is minimal. So the demand curve for toasters is normal — downward sloping. Luna: But even among luxury goods, there can be a tipping point. When does high price become too high? Lucas: There's research suggesting that once a price passes a certain threshold, even Veblen goods start to see a drop in demand. It's an inverted-U shape. For example, a $50,000 watch might sell better than a $30,000 watch, but a $500,000 watch might only appeal to a tiny fraction of buyers. The Veblen effect has a range. Luna: And that range varies by culture and time. In emerging markets, where conspicuous consumption is growing, the Veblen effect might be stronger. Lucas: Yes. A study from a few years ago showed that in China, luxury brands often price their goods higher than in the West, and demand is even more robust. Partly because the signaling value is higher in a society where wealth disparities are visible and social mobility is celebrated. Luna: So what's the takeaway for a marketer or a consumer? If you're selling something with status potential, you might be underpricing it. Lucas: But be careful. You need to have the brand cachet to support a Veblen strategy. If you're not already seen as exclusive, raising prices might just drive customers away. The Veblen effect works best when it's combined with real quality and a strong brand story. Luna: And for consumers, it's a reminder to ask yourself: am I buying this because of its utility, or because of the price tag's signaling? Lucas: That's a good reflection question. Behavioral economics is partly about understanding those hidden motives. So next time you see a luxury brand announce a price increase and expect demand to surge, you'll know why. Luna: And maybe you'll pause before clicking 'buy now' on that $10,000 watch. Lucas: Or maybe you'll buy it precisely because of the Veblen effect. Either way, you'll be aware of the mechanism at play. And that's the point.