We examine conditions under which "Veblen effects" arise from the desire to achieve social status by signaling wealth through conspicuous consumption. While Veblen effects cannot ordinarily arise when preferences satisfy a "single-crossing property," they may emerge when this property fails. In that case, "budget" brands are priced at marginal cost, while "luxury" brands, though not intrinsically superior, are sold at higher prices to consumers seeking to advertise wealth. Luxury brands earn strictly positive profits under conditions that would, with standard formulations of preferences, yield marginal-cost pricing. We explore factors that induce Veblen effects, and we investigate policy implications.
Hodrick, Laurie Simon, and B. Douglas Bernheim. "Veblen Effects in a Theory of Conspicuous Consumption." American Economic Review 86, no. 3 (1996): 349-73.
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