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The HR strategy and the Veblen effect – Sriram Prabhakar

25 Nov 2023.

At the age of 23, Julius Caesar was a rising junior politician who possessed two significant advantages: brains and confidence!

Pirates from Sicily took him prisoner as he was traveling across the Aegean Sea. They demanded 20 talents (an antique measure of heft; one roman talent is about equal to 100 pounds, but I digress) in silver as payment. That is almost $600,000 in today’s currency.

Caesar remarked that their behavior was absurd. It was impossible for him to let himself be bought so cheaply. The pirates were perplexed and hesitated. Caesar demanded that the amount of the ransom be
increased to 50 talents of silver, or 1,550 kg, or almost $1.5 million.

The pirates were at a loss as to how to interpret this. Typically, their prisoners made an effort to flee as cheaply as they could. They were unaware of what was happening. Why protest, though, if he promised
to double the ransom?

To raise the funds, they permitted Caesar’s troops to return to Rome. And Caesar unexpectedly rose to prominence and became well-known in Rome during his absence. Nobody had ever before been ransomed for a price this huge.

People felt he had to be someone really significant, someone very remarkable. Caesar became well-known and established himself in politics as a result of the demand for a huge quantity of silver as ransom.

He had just invented ’The Veblen Effect’. Although Thorstein Veblen wouldn’t give it that name for another 2,000 years!

It’s interesting to note that the Veblen Effect is an illusory psychological tactic that dates back thousands of years. It explains the phenomenon wherein buyers believe that items that are more expensive have more worth and are superior to what they actually are—just because they cost more!

Ironically, the Veblen Effect still exists despite all of our knowledge, technical advancements, awareness, and thorough comprehension of it.

There are numerous examples…Louis Vuitton, Cartier, Aston Martin, Bentley, Apple Phones, Rolls-Royce, Rolex, Harrods, Cristal Champagne, Waterman, Sheaffer etc.

Even if these products aren’t functionally any better than their less expensive counterparts, their high cost alone makes them appear superior, more precious, and hence far more attractive.

In a sense, Caesar established himself as a Veblen brand. Compared to everyone else in Rome, he held himself in much higher regard. However, to the best of Rome’s knowledge, it wasn’t he who had done it; rather, it was an impartial assessment, which gave it credibility and authenticity. And his troops had no trouble raising the ransom, for Caesar was now so highly esteemed. After their return to the island, the pirates set him free.

Caesar, however, was not about to let the pirates keep any of that kind of cash. Even though he was now a very powerful and well-known man, he could easily muster a sizable army, which he utilized to find the pirates, retrieve all the looted goods in addition to the money, and then put them to death. Caesar thereby rose to great wealth and fame.

With the same blend of brilliance and confidence, he eventually rose to become the emperor of all of Rome. Caesar also oversaw the Roman Empire’s golden age, which saw it grow from Spain to Germany
and from Britain to the Middle East. This was possible because Caesar recognized that reality started in the mind.

Therefore, the human mind is the most significant piece of real estate on which to establish a claim. Forming a perception is one way to lay claim to someone’s mind. And managing the setting is how you establish that impression. You may master the mind by mastering the situation. You can influence reality by controlling your thinking. Many think that this is just a marketing ploy to use the Veblen Effect to sell unaged scotch for a lot more money!

And that’s how the Veblen Effect, when used correctly, turns into an extremely profitable and successful marketing tactic—to part customers from their hard-earned cash while also making them feel good about
it and making them come back for more!

Luxury-good dealers profit from price hikes to increase sales by taking advantage of the Veblen effect, which is based on conspicuous consumption and is best defined by Bagwell and Bernheim (1996, p. 349).

Thorstein Veblen (1899) observed that affluent individuals often make ostentatious purchases in order to display their wealth and improve their social standing. Veblen’s theories have led to a substantial body of
research on “prestige” or “status” commodities.

This also applies to human resources, where pay becomes a negotiating chip, particularly in prestigious schools like the IITs, IIMs, and NITs. The employing corporation pays top dollar salaries even though they are unsure if they are justified; hiring from elite colleges has become a marketing tactic.

This article contributes to the body of knowledge on the Veblen effect by
(1) examining the mediating role of goodwill on the price-demand relationship and
(2) showing that the Veblen effect is consistent with a normal downward-sloping demand curve. It contributes to the literature on dynamic pricing and advertising by
(a) using universal non-linear demand and goodwill functions and
(b) obtaining structural (contrary to parametric) findings.

The best way to comprehend the Veblen effect is to think about the importance of goodwill, which is recognized in relation to luxury items. The results offer new insights into the relationship between price and demand, which is intriguing from a theoretical standpoint. Practical relevance arises from this article’s obvious managerial implications for the marketing and pricing of luxury goods whose sellers benefit from the Veblen effect.

The ‘Counter-Veblen Effect’ also exists, wherein people think that their ability to find good deals or exercise caution when making purchases would be respected. People who brag about how little they paid for an item that is ordinarily pricey are an example of this. It may also serve as an incentive to purchase at bargain and discount stores.

The Veblen effect and the Giffen effect are not the same. A Veblen good has an upward-sloping demand curve in contrast to the typical downward-sloping demand curve. In contrast, a Veblen good is usually a desirable, high-quality product, whereas a Giffen good is a substandard product that is difficult to replace.

Within the realm of talent acquisition, a connection may be drawn between firms vying for highly soughtafter personnel and possibly providing them with larger compensation as a representation of the employee’s worth or the company’s prestige.

In summary

Comprehending the Veblen Effect and its ramifications is imperative for brands to effectively navigate the contemporary market. Businesses can take advantage of this economic phenomenon by cultivating a loyal, high-spending customer base by striking a balance between the draw of prestige pricing and the delivery of true quality and value. They must be mindful of the difficulties and hazards that could arise from using this tactic, though. Understanding the customer and providing genuine value are essential for
utilizing the Veblen Effect successfully in the ever changing industry.

• Can an analogy be drawn the Veblen effect in top campuses?
• Is it applicable to other areas of the HR spectrum?

Bibliography: The Veblen Effect: Unmasking the Illusion of Value |

by Prof wg cdr Dr SP Kaushik | Medium

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