By Kelvin Tai - Economics and Management Student @ Harris Manchester College, Oxford
It is seemingly intuitive that the higher the price of a good, the lower the willingness of people to pay for it. For example, some things might have a lower elasticity of demand, meaning that the decrease in demand for the good is less responsive than the increase in price. A 50% increase in the price of asparagus is more likely to put you off the purchase than a corresponding percentage increase in the price of pasta. In both cases, demand has an indubitable negative relationship with the price.
There are some anomalies, however, where demand actually increases with the price: Veblen goods and Giffen goods. Veblen goods are those that serve as a status symbol; the satisfaction derived from the possession of such goods come less from the utility than from the symbolic messages they convey. A higher price for these goods could potentially enhance the product’s exclusivity and hence drive up demand. There are multiple marketing schools of thought which I will not examine here due to the constraints of the article format.
On the other hand, Giffen goods have less to do with marketing than economic mechanisms. Giffen goods are inferior goods, which is the term in economics for goods that enjoy a higher demand when income levels fall. This starkly contrasts them with Veblen goods, which as status symbols would be luxuries instead.
Say an impoverished agrarian household has a choice of meat and wheat. They would prefer to consume meat due to taste (and plant-based meat is priced out of their budgets). Wheat is cheaper than meat and has a higher calorie count. Due to the importance of calories for their daily activities, the household must consume wheat to a certain level and then use the leftover money to buy meat. If the price of wheat rises, the money left over for meat is reduced. To make up for the caloric shortfall due to lower consumption of meat, the household decides to buy more wheat as a substitute. This generates the counter-intuitive scenario where wheat demand increases even though the price has risen.
With the above scenario, the conditions necessary for the emergence of a Giffen Good scenario are highly rigid.
The household must not have enough money to maintain the level of consumption of meat in the face of a wheat price increase
There are only two goods available, one being a staple (wheat) and the other a “luxury” (meat)
The staple good has to be a cheaper source of calories
Consumer must already be consuming a “luxury” good so they do not just cut back on their consumption of the staple.
As such, the notion of Giffen goods is sometimes criticised as existing only in theory and not a particularly useful economic model. In response, I would highly recommend reading Jensen & Miller (2008) as they highlight cases of Giffen behaviour occurring in some parts of China that they have studied. Therein lies the beauty of economic models; theories posited by economists must be backed by empirical evidence to gain credibility.
Further Reading:
Jensen, R., & Miller, N. (2008). Giffen Behavior and Subsistence Consumption. American Economic Review, 98(4), 1553-1577.
Aaker, D. (1990). Brand Extensions: The Good, the Bad, and the Ugly. Sloan Management Review, 31(4), 47-56.