Have you ever considered how behavioural aspects of an individual plays an important role in economics and it can impact the demand for a good drastically? Several studies have been done in this area in the past. When considering demand, we tend to relate it to the notion of the law of demand (Quantity demanded of a good is inversely related to its price) and tend to ignore other aspects. However, the value of a product is not always dependent on the utility a consumer derives. For some goods, social superiority derives demand.
Let us take an example first. Suppose when Mr. A was 10 years old, his friend bought this latest new Pokémon toy that had just entered the market. Seeing the toy, Mr. A desperately wanted it too. So he ended up buying it after possibly crying and having rounds of negotiations and requests with his parents/guardians. Now let us take a different scenario. Suppose now, Mr. B’s friend bought a new Ben10 toy, but almost everyone Mr. B knew had already bought it. Hence, Mr. B’s desire to buy this toy vanished as he did not want to be a part of the crowd. It’s interesting how we have been in both positions several times yet find it difficult to understand simple economic concepts. The demand for the toy in both scenarios was not dependent on its price but rather on its demand by their friends. This effect, where the demand increase/decrease due to others’ consumption is known as network externalities. It may either be positive or negative. Here, the former scenario is an example of the demonstration effect/bandwagon effect (positive network externality), while the latter one is an example of the snob effect (negative network externality). We will be focusing on the latter one in this article.
To define, Snob Effect refers to a phenomenon where the demand for a particular good by the richer section of the society is inversely related to demand of the same good by the poorer section. Consider Mr. C who is a millionaire, he will not be willing to buy a basic mobile model that is owned by a large share of the population. Hence, this effect comes into play when people want uniqueness, are less willing to purchase a good that has widespread usage and value the exclusivity of owning rare products. Snob value refers to the value attached to a particular good for its power to showcase social superiority. The lower the availability, the higher is the snob value. Snob Appeal refers to the quality of a product to appeal to a consumer in a way that can improve his/her exclusivity.
It’s imperative to understand that this effect can have a positive as well as a negative impact on a commodity. However, in general, it reduces the demand for a commodity. Higher the snob value of a good, lower is the number of people owning it. As in the example of Mr B discussed earlier, the demand for a commodity may go down drastically due to the snob effect. On the other hand, some products that are ultimately purchased by the richer section to showcase social superiority (say an iPhone), face the positive side of snob effect as here the demand goes up by the richer section. However, the goods that encounter the positive side may have low practical value but very high economic value. Such as a rare work of art, sports car, expensive watch or anything exclusive.
EFFECT ON DEMAND CURVE
Snob Effect makes the demand curve of a normal good less elastic and the demand curve of a luxury good positive. To purchase more luxury goods due to this effect, people tend to reduce their demand for normal good even if its price is decreasing. However, this decline is not to the extent that it neutralizes the total price effect. Hence, it makes the demand curve of the normal good less elastic. On the other hand, the demand for a luxury item (say iPhone) increases with the increasing price due to the snob effect violating the law of demand leading to a positive slope.
IS IT SIMILAR TO VEBLEN EFFECT?
Those familiar with economics know very well about the Veblen Effect. In theory, it’s possible to misinterpret and conclude Snob and Veblen Effect as the same considering that both effects have that element where the richer section of the society purchase a commodity that is rare to showcase their social superiority. However, the difference lies in the fact that Veblen effect is governed by price (higher price is equal to higher quality) whereas Snob effect is governed by demand (high demand by poorer section means inferior quality and vice versa). Despite this, it’s necessary to understand that the demand for Veblen goods (goods that show the Veblen effect) is influenced by the snob effect. It is due to this effect that people are willing to buy Veblen goods when their price increases to showcase social superiority. If the price of this product decreases, its snob appeal falls and vice versa.
In today’s world, it is necessary for large companies targeting middle-class consumers to ensure that their product does not lose their market share due to the snob effect. There’s a tendency whereby brands lose their status and identity in an attempt to increase market share by lowering the price. Therefore, producers sometimes pay special attention to ensure that their products don’t become a part of mainstream culture and trigger snob effect due to promotional discounts. The psychological perception of a commodity sometimes is the most important determinant and hence the bigger picture needs to be seen to understand the aspects of demand and supply.