The Veblen effect

Gio, 24/11/2022 - 12:00 / 13:00

T03, Viale Romania

Speaker: Règis Chenavaz ,  KEDGE Business School

Abstract

The increase of demand in price, an exception to the law of demand, is known as the Veblen effect. In Luiss' seminar we present two works on the Veblen effect.
In the first (published) work, we consider a profit maximizing monopoly which by means of advertising impacts the price-demand relationship. We show that advertising and goodwill play an important role in making the Veblen effect more prevalent than expected. By employing optimal control theory, we capture the evolution of the variables over time, which may exhibit the Veblen effect where price and demand move in the same direction.
In the second (in progress) work, we investigate the price-demand relationship, when price is the sole control variable. We assume that a higher price (control variable) enhances brand-image (state variable) translating into more sales. Using optimal control theory, we look at the conditions for the Veblen effect to happen.
Eventually, a more comprehensive understanding of firms’ decisions driving the Veblen effect has a promising impact on securing long-term profits.