The law of demand has an exception

Standard economic theory predicts that demand falls as price rises. For most goods, in most markets, this holds. Veblen goods are the documented exception: a category of product for which demand increases as price increases, producing an upward-sloping demand curve. The mechanism is not irrationality — it is a different type of rationality operating on a different type of value.

Thorstein Veblen’s 1899 analysis of the leisure class established the foundational insight. A significant category of human economic behaviour is governed not by utility maximisation in the conventional sense but by conspicuous consumption — the purchase of goods specifically to communicate social position through observable expenditure. The product’s functional utility is secondary or irrelevant. What is being purchased is the signal, and the signal requires a high price to function as a credible indicator of wealth.

For a Veblen good, reducing the price does not simply reduce revenue — it destroys the product’s primary value proposition. A Hermès Birkin bag priced at £100 is not a cheaper version of the same product; it is a categorically different and worthless product, because the entire value resided in the exclusivity that the high price communicated.

The costly signalling mechanism

Bagwell and Bernheim’s 1996 American Economic Review paper formalised the economic mechanism precisely. Luxury brands are not intrinsically superior to budget brands in functional terms — they set prices above production costs to appeal to consumers’ desire for status. The high price functions as a credible signal of social position because it is genuinely costly: only those who can actually afford the good can send the signal. If the good were cheap, anyone could buy it, and it would cease to function as a reliable indicator of wealth.

This is why luxury brands resist discounting even when demand softens. Discounting would reduce the signal’s reliability by making it accessible to people who cannot genuinely afford it at normal prices — contaminating the signal and destroying the social value that makes the product desirable. The high price is not incidental to the luxury good’s function. It is constitutive of it.

One important caveat the research is honest about: the causal direction between high price and high demand in Veblen goods is genuinely difficult to establish from market data, since high prices and high demand typically co-occur in luxury markets. The mechanism may also operate through social diffusion and hype driving demand, which subsequently drives up prices. Both pathways are plausible and may both be operating.

The three social demand effects

Leibenstein’s 1950 framework distinguished three effects that can operate simultaneously on luxury goods. The Veblen effect is the desire to purchase specifically because of the high price — the price itself is the status signal. The snob effect is the desire for exclusivity — demand decreases as more people own the good, regardless of price. The bandwagon effect is the opposite — demand increases as more people own it.

These can pull in different directions for the same product. A luxury brand that discounts may reduce the Veblen effect through price reduction while simultaneously triggering the snob effect through reduced exclusivity, producing a demand collapse larger than either effect alone would generate. This double mechanism explains why Burberry’s licensing expansion in the early 2000s — allowing the iconic check pattern to proliferate through lower-priced goods and counterfeit markets — was so commercially destructive. The pattern lost its function as an exclusive status signal, collapsing both effects simultaneously. The subsequent recovery under Angela Ahrendts required restricting the check’s availability and rebuilding the exclusivity architecture that the licensing decisions had eroded.

The four properties that sustain Veblen demand

Luxury brands that successfully maintain upward-sloping demand curves share four structural properties. A high absolute price that creates the access barrier. Scarcity that maintains the exclusivity signal. Visibility that allows the status display function to operate in social contexts. Quality above a functional minimum that makes the social signal credible rather than obviously hollow.

Ferrari’s deliberate production cap — maintaining annual production consistently below what market demand would support — is the most studied corporate operationalisation of this insight. Ferrari could sell more cars. The decision not to is not a supply constraint; it is a deliberate preservation of the scarcity component. Hermès’s waitlist architecture for the Birkin extends this further: neither willingness nor ability to pay is sufficient for acquisition — a purchase history with the brand is required. The result is that Birkin bags consistently trade on secondary markets at premiums above retail, reversing the normal depreciation pattern of consumer goods. In a genuine Veblen good, the social signal value can exceed the original retail price precisely because access restriction creates positional value that price alone cannot purchase.

The evolving Veblen landscape

The mechanism is not static. Consumer behaviour research increasingly documents that for younger luxury consumers in particular, a high price alone is no longer sufficient to command the Veblen premium — it must now be explained and justified through values, craftsmanship narrative, and transparency. Movements around high-quality second-hand luxury and locally crafted goods reflect a shift in the social comparison axis: the signal being sent has evolved from “I can afford this” toward “I have the taste and knowledge to choose this.” The barrier to entry has become more complex than price alone, which makes the Veblen architecture harder to build for new entrants but also creates new opportunities for brands that can credibly signal values alongside exclusivity.

If the social comparison dynamics described in this article connect to patterns in your own consumption or self-evaluation that are significantly affecting your wellbeing, that is worth acknowledging. UK: Samaritans (116 123, free, 24/7). Mind (0300 123 3393). International: iasp.info/resources/Crisis_Centres.

A book worth reading alongside this

Deluxe: How Luxury Lost Its Lustre by Dana Thomas is the most practically grounded journalistic account of how luxury brands manage — and sometimes destroy — the Veblen effect through production, distribution, and licensing decisions. Thomas’s reporting on LVMH, Burberry, Gucci, and the broader luxury industry over the period when mass-market expansion strategies collided with Veblen economics provides the commercial case study material that makes the abstract mechanism concrete. For any entrepreneur thinking about premium positioning and the conditions under which it holds or collapses, this is the most direct available account of what the Veblen architecture looks like from the inside of the brands that built and then damaged it.

Have questions about this article?

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If the social comparison dynamics or commercial pressures described here are significantly affecting your wellbeing, speaking with a psychologist is the right next step. UK: Samaritans (116 123, free, 24/7). Mind (0300 123 3393). BACP therapist finder: bacp.co.uk/search/Therapists. International: iasp.info/resources/Crisis_Centres. Crisis Text Line — text HOME to 741741.

This article is for educational and informational purposes only. Sources: Veblen, T. (1899), The Theory of the Leisure Class. Bagwell, L.S. & Bernheim, B.D. (1996), American Economic Review, 86(3), 349–373. Leibenstein, H. (1950), Quarterly Journal of Economics, 64(2), 183–207.