The Veblen Effect: The Secret to Desirable NFTs

"Veblen" sounds like a word that might come out of Star Trek, but the term "Veblen Good" or "Veblen Effect" is an economics concept that can give us a better understanding of how price and desire might interact.

In this article we’ll go over the concept of the Veblen good as well as how it might play a role in the NFT marketplace.

What is a Veblen Good?

To tell the story of Veblen goods and how this concept might relate to NFTs, we first must understand the definition of a Veblen good.

A Veblen good is a good where, as the price goes up, people demand more of it.

Yes, you heard that right.  Higher prices leading to more demand.

Veblen goods are associated with luxury goods, status symbols, and that lovely idea of conspicuous consumption.

So now the picture might have gotten a bit clearer for you - these are the types of products where you want people to know that you are rich enough to afford such things.

The high price of the product  is a public demonstration of your wealthy status.

Note: Veblen goods are named after economist and sociologist Thorstein Veblen, who developed the idea of conspicuous consumption in his book The Theory of the Leisure Class (published in 1899). One general idea from this work is that people can be status seeking in the decisions to spend money.  While I believe that Thorstein Veblen made a number of key observations related to conspicuous consumption, I tend not to agree with much of his work, particularly as it relates to business profits being at odds with society (but that’s an article for another time). 

Are Veblen Goods a Violation of the Law of Demand?

Some economists point out that Veblen goods violate the law of demand (however, I don’t believe this is the case, as I explain later in the article).

Why Do People Believe Veblen Goods Violate the Law of Demand?

To start, we first need to understand the law of demand -

The law of demand states that as price increases, the quantity demanded decreases, everything else being equal.

In plain English this means when the price of a good goes up, people don’t want to buy as much of it (assuming nothing else changes - i.e. people’s income stays the same, there are no new good substitutes, etc.).

Sounds kind of obvious, right?

So if that law were violated, what would that look like?

Well, what if, as the price went up, people wanted MORE of it!

That’s a Veblen good:  a product where, as the price goes up, people demand it more and, hence, seemingly a violation of the law of demand.

Why Veblen Goods May NOT be a Violation of the Law of Demand

This might get a little tricky to explain, so first let’s start off by looking at demand, outside of price.

Anything outside of price that increases demand for a product results in a "shift" of the demand curve.  This "shift" just means that people will demand more of the product at all price levels.

There are several factors that can shift the demand curve, so let’s just focus on the general idea of a change in "taste and preferences" for a product.

So, if there is an "improvement in taste and preferences" for the product, that would simply mean consumers like it more than before.

For example, maybe some big-wig actor/influencer says, "hey, I really like this product" and people respond by thinking, "yeah, that actor is really cool, I want to be cool too, so I want that product now".

An actor/influencer says the product is great > that increases the “taste and preference” for the product > people now demand that product more.

This fits perfectly with the law of demand, because now people demand more of the product at all price levels.

The Veblen Effect: When Price Itself Becomes a Feature

Ok, now for the tricky part -

Let’s say I market my product as an exclusive brand.

I get rich people to use my product and show it off in public

I then jack up the price making sure that people are generally aware that this is a high-priced product.

In this case, the high price might become a feature of the product itself.

And that feature is the public demonstration that this product is a status symbol; a product that is out of reach to the ordinary pleb.

Hey, look at me, I have something you cannot afford.

The point I’m trying to make is that if price can become a feature of the product itself (thereby increasing the "taste and preference" for the product), it would shift the demand curve - and therefore NOT be a violation of the law of demand.

OK, maybe my explanation is a stretch because it asks you to see price, not as a price, but as a feature - kind of mind bending.  But I think it works 🙂

Price Alone Can’t Create a Veblen Effect

If you haven’t gathered already, let me state this as clearly as possible: You cannot create the Veblen effect by simply increasing the price of the product. 

The brand, product, or service, must already have some level of desirability and/or exclusively attached to it.  Then, and only then, can price give that extra kick.

To demonstrate, let’s look at a Veblen good fail: the I am Rich App.

A Veblen Good Fail: I am Rich App

Back in 2008, during the early days of the mobile app revolution, an app called "I am Rich" appeared in the Apple app store.  It was an app that explicitly stated that it had no useful purpose or hidden functionality.  It simply displayed a glowing red icon.  When you pressed the icon, it displayed the following:

"I am rich.  I deserve it.  I am good, healthy and successful"

The app's price: $999.99

The app actually made 8 sales before being taken down.  

The issue here is that the app had no brand; no community; no scarcity; no exclusivity; nothing that would compel a rich person to see this app as a status symbol.

Simply selling something for a high price does not induce the Veblen effect.

The Veblen Effect and NFTs

A Digital Flex

If you’re lurking on NFT Twitter, you might, from time to time, see the term “digital flex” or simply just a “flex”.  It is an interesting term because it generally describes the idea of a Veblen good perfectly wrapped in the parlance of the NFT world.

A digital flex is basically when you show off an NFT that people generally know to be expensive.

Sure, it may also be from a well-known artist, or from a popular collection, or have some other interesting attribute, but if it doesn’t have a high market price, it really isn’t much of a flex.

For a flex, price matters.

In other words, the high price itself is an attribute - it is part of the digital flex.

And what is interesting about a flex in the world of NFTs is that you can prove that you own the NFT - it’s in your wallet for all to see; you didn’t just rent it for the day and post some pictures on Instagram. NFTs are provable ownership.

CryptoPunks and the Veblen Effect

The Veblen effect is psychological in nature, so it can be difficult to exactly know why people do the things they do - we can only observe and hypothesize.

CryptoPunks is an interesting example as it highlights some of the difficulty in understanding if or when something becomes a Veblen good.

CryptoPunks started off as a free mint in 2017.  It wasn’t until early 2021 that the Punks started to really take off.

But why or how?

Although I won’t get into a lot of details, here are a few key points:

• The people that minted CryptoPunks in 2017 were deep into crypto and knew how to use the tools to mint a Punk
• Some of these people stayed in the space and later became OGs (tastemakers, so to speak)
• CryptoPunks is a project that was referenced in the Ethereum NFT standard, ERC-721 (so it’s an important historical collection as it helped in the development of the NFT standard, which wasn’t implemented until 2018)
• When the NFT market boom started in 2021, people took notice of this project due to its historical significance and its OG status in crypto.  
• During the early phases of the 2021 NFT boom, people started using their Punks as a Twitter PFP, which helped people publicly show off Punks
• Since supply was fixed and demand started increasing rapidly, prices for Punks skyrocketed
• The rapidly rising prices attracted investors and speculators, which further pushed prices higher.

So, where does the Veblen effect come into this story?

We can hypothesize that there are several reasons why people bought Punks.  

In the early phases, it may have been for pure joy - an interest in crypto and/or digital art.  Later it may have been to be a part of the Punks community; to collect an item that may have historical significance; and/or to use it as an investment vehicle.

But as prices got very high, were some people buying these Punks because the price was high?  In other words, did the high prices actually attract more buyers?

I think that is at least plausible - that there is some Veblen effect here - some idea that the high price of a CryptoPunk became a digital flex - a way, for at least some people, to demonstrate to the world that they are crypto rich.

Final Thoughts

Economics is classically defined as the study of choices in the face of scarcity.

But to make things clearer, we might need to add in the word human… how humans make choices.

In fact there is an entire field of behavioral economics that tries to understand the psychological and social dynamics of how people make choices.

Thorstein Veblen made such observations in his work, in particular, around conspicuous consumption.

But he seemed to have disregarded these human tendencies as valueless frivolity of the upper classes.

It is not.

We, as humans, use symbols to demonstrate all sorts of things, including group memberships, allegiances to certain ideas, and yes, social standing.

NFTs are a part of that human experience.  And, yes, high-priced NFTs can act as a "digital flex".

That doesn’t make us frivolous, it makes us human.

As the 80’s band Level 42 put it in their song "Something About You":

"Is it so wrong to be human after all"