The Foundations of the Veblen Effect

When a high price becomes a reason to buy

In 1899, the American economist and sociologist Thorstein Veblen published The Theory of the Leisure Class. In it, he described a phenomenon that directly contradicted classical economic theory:

For certain categories of goods, demand rises with price instead of falling. The high price is not a barrier — it is the reason for purchase.

This is the Veblen effect, also known as conspicuous consumption. A €50,000 watch, a €20,000 handbag, a €300,000 car do not sell despite their price — they sell because of their price. Lowering the tag would collapse the volume.

This mechanic seems reserved to historic luxury houses. It is not. Any entrepreneur, freelancer, or SaaS publisher can activate it, provided they understand the underlying psychological gears.

A demand curve that flips

In classical economics, the demand curve slopes downward: as price rises, fewer people buy. The Veblen effect produces a partially upward-sloping curve in specific segments:

Price
  │                    ╭─── Veblen effect
  │                   ╱
  │                  ╱
  │                 ╱
  │   ╲           ╱
  │    ╲         ╱
  │     ╲       ╱
  │      ╲_____╱
  │       Maximum desirability zone
  │       ("expensive enough to be desirable")
  └────────────────────────────────► Quantity demanded

Below a certain threshold, a low price signals absence of value, absence of scarcity, absence of social filter. Above it, price becomes a status marker that the buyer offers themselves — and offers to those who watch.

The founding experiment: the Brochet wine study

A pivotal study by Hilke Plassmann, John O'Doherty, Baba Shiv and Antonio Rangel (Caltech, 2008) demonstrated this through neuroimaging. Participants tasted wines under fMRI. The price of each bottle was announced before tasting.

Findings:

• Participants reported preferring bottle B
• The medial orbitofrontal cortex (the region encoding perceived gustatory pleasure) lit up significantly more when the announced price was high
• The pleasure was not faked — it was real and neural

A premium price doesn't just change what the buyer says. It changes what the buyer's brain feels.

This is the pivot of the Veblen effect: a high price improves the subjective experience of the product, independently of objective quality.

Three variables that activate the effect

The Veblen effect doesn't trigger automatically with a price hike. It requires three conditions, identified in the work of Bernheim, Bagwell, Heffetz on signaling consumption:

1. Visibility

A Veblen product must be seen or mentioned. A watch is visible on a wrist; a €25,000 program is mentionable on LinkedIn; a coaching engagement is citable in a keynote. Without visibility, no signal — therefore no status effect.

2. Perceived scarcity

If everyone can have it, it stops signaling anything. Scarcity can be:

• Numerical: limited edition, numbered series, restricted seats
• Social: invitation-only, sponsorship, selection
• Geographical: a single store, selective distribution
• Temporal: short purchase window, annual launch

3. Narrative coherence

The product must tell a story the buyer wants to claim. A high price is only credible if it is anchored to a story of craftsmanship, origin, character, or community. Without narrative, the high price reads as arrogant or fraudulent.

Veblen vs Snob vs Bandwagon

Three cousin effects intertwine in the psychology of status. Distinguishing them is essential to avoid choosing the wrong lever:

A high-end product often combines Veblen + Snob. A viral product often combines Bandwagon + emerging Snob. Confusing them leads to severe positioning mistakes.

Why our brain rewards a high price

Three neuro-behavioral mechanisms converge:

Price as a quality heuristic

Faced with uncertainty (an unknown wine, an unknown vendor, an unknown program), the brain uses price as a quality proxy. The heuristic is fast, cognitively cheap — and exploits a real average correlation, though far from systematic.

Cost as a signal of self

According to costly signaling theory (Zahavi, 1975), a signal is credible only if it is costly to send. Buying expensive signals to others — and to oneself — that one belongs to a particular group. Cost is not a side effect; it is the mechanism.

Self-perception

Following Daryl Bem, we partly infer our own identity from our behavior. Buying premium becomes internal proof of one's level. This mechanism fuels the very strong loyalty of high-end customers.

The Veblen effect beyond luxury: 5 modern territories

The Veblen effect is no longer the preserve of fashion houses. It operates in:

• B2B SaaS: a five-figure-monthly "Enterprise" plan signals to the CEO that they are not buying an SMB tool
• Coaching and training: a €30,000 program signals an elite circle, regardless of its content
• Health and wellness: a €8,000 retreat signals premium self-care
• Design furniture: a €4,500 chair signals taste and cultural capital
• Children's education: a €30,000/year private school signals a social horizon for the family

In each case, the high price opens a market that a low price would close.

Pitfalls of poorly executed Veblen

The Veblen effect is powerful but fragile. It collapses in several scenarios:

Luxury does not forgive promotion. A 30% discount on a Patek Philippe, read by the market, could destroy a decade of positioning.

What you will learn

Summary

The Veblen effect, theorized in 1899 and confirmed by contemporary neuroscience, shows that a high price can increase demand instead of reducing it — provided that visibility, scarcity, and narrative are aligned. The price then becomes a status signal the buyer emits for others and for themselves. This effect is no longer confined to traditional luxury: it now drives a large share of premium SaaS, coaching, consulting, and education. The next chapter details the precise psychological gears that make the mechanism so compelling.