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Veblen Goods

In one sentence: A category of goods where higher prices drive more desire, not less — the textbook demand curve running backward. Ben coins the label for Birkin and Kelly bags, which retail anywhere from $10,000 to $100,000 depending on the leather: "Normally, price is where supply meets demand. As the price of a good increases, demand for it would go down. A Veblen good is the opposite. As price increases, people actually want it more. Price ends up being a signal that the item is desirable, and thus it stimulates demand now."

The Mechanism — Why Higher Prices Pull in More Demand

  • Price itself is the signal, not the cost: introducing the term, Ben calls it "essentially the opposite of everything you learned in econ 101." A normal good's demand falls as price rises; a Veblen good's rising price is the message that the thing is desirable, which pulls demand the other way.
  • The episode actually stacks two distinct defiances of economics, not one: right after defining the term, Ben adds a second layer — "Birkin bags sell below the market clearing price. That is another defiance of microeconomics." Being a Veblen good only describes the shape of the demand curve; selling deliberately below the clearing price is a separate strategic choice Hermès layers on top of it (see Discussion & Boundaries below — the episode treats them as related but not identical).
  • The supply-demand mismatch amplifies demand across the whole line: the transcript cites a Substack writer ("310 Value") who observed that the scarcity created by this mismatch further boosts demand for Birkins and Kellys specifically, elevates Hermès's overall status, and drives demand for the rest of the product line — customers buy other Hermès goods to build a relationship with the company, hoping one day to be allocated a bag at the below-market price.
  • The mechanism only works because supply is deliberately locked down: one Kelly is made by a single artisan from 36 pieces of leather, matched as closely as possible from the same hide, over roughly 20 hours across several weeks; becoming a Hermès artisan takes two years of training plus at least three more before you're allowed to touch a Birkin or Kelly; no production site exceeds 250–300 people (Axel: "if you have more than 300, it is not a workshop, it's a factory"). Without that hard ceiling on output, underpricing wouldn't manufacture real scarcity, and the Veblen dynamic would have nothing to bite on.
  • The money "left on the table" is explicitly framed as investment, not loss: Ben's own words — "Essentially, there's consumer surplus in economic terms." David backs it with a revenue breakdown: since Axel took over in 2013, revenue has compounded at 15% a year against a stated production-growth target of 7%, implying price increases account for roughly 7–8 points of that growth — "we're leaving consumer surplus on the table here, because we don't want to be seen as that brand that is $100,000 handbags, even though they are $100,000 handbags."
  • Steady, modest annual increases become an "invest and it appreciates" signal in their own right: prices have risen roughly 7%/year across the whole line for the past decade (4–5 points above inflation), a pattern the episode compares to Rolex's playbook of small, predictable yearly increases that reassure buyers a purchase will hold or gain value — counterintuitively pulling in buyers who otherwise wouldn't have bought. David links it to Acquired's Porsche episode, where the same "it appreciates rather than depreciates" phenomenon shows up for collector cars.
  • The boundary is about volatility, not the dollar figure: David adds, "There's a gaucheness to it." Ben's read is that the line isn't about the raw price — it's whether the price swings: "if it's three times as much as it was a decade ago, it's harder to trust the intrinsic value of the good if it's fluctuating all over the place."

The Case in This Library — How Hermès Applies It

  • Naming the category: Ben directly labels Birkin and Kelly bags (retailing $10,000–$100,000 depending on the exotic leather) as this episode's clearest example of Veblen goods.
  • Secondary-market evidence: one Birkin resold for $500,000; Victoria Beckham owns 100+; it's called "the Patek Philippe Nautilus of handbags," and buyers treat it almost as an investment vehicle.
  • The allocation game (the SA script): Ben role-plays a sales associate's pitch — "We don't have it today, but gosh, if you are a great customer of ours and we maintain a relationship with you, let me write down your number... It could be a few years, but I'll reach out as soon as we have something. You're an important customer of ours. If you want to show us you're an even more important customer, please do by all means." The hard part isn't producing $12,000 — it's earning the allocation; Birkins and Kellys aren't even displayed in stores, yet they're roughly 25–30% of revenue.
  • Deliberate scarcity as the supply-side counterpart: one artisan per bag, 36 matched pieces of leather, ~20 hours across weeks; two years of training plus at least three more before touching a Birkin or Kelly; no site above 250–300 people. The Wall Street Journal's 2020 estimate put combined Birkin and Kelly production at ~120,000 bags a year, with roughly 1,500 artisans doing nothing but those two bags all day.
  • The actual pricing discipline: about 7%/year across the line for the past decade (4–5 points above inflation) — far more restrained than the rest of the industry. The episode names Chanel specifically, noting it has raised prices on pieces like the classic flap medium "in record amounts" in recent years, which Hermès has not matched. The Birkin launched around $2,000 in 1984 (~$6,000 in today's dollars); today's retail price runs roughly double that inflation-adjusted baseline. The Kelly's price, inflation-adjusted, isn't far above its original 1950s price.
  • The revenue math that proves this is a choice, not a constraint: 15% compounded annual revenue growth since Axel took over in 2013, against a stated 7%/year production-growth target, implies roughly 7–8 points of annual price increase. On air, Ben runs the counterfactual: raising the Birkin from $12,000 to $20,000 would add roughly $8,000 of pure profit per bag, times ~120,000 combined Birkins and Kellys a year — a large, mostly unresisted windfall from a price-insensitive customer base. Hermès doesn't take it.
  • The Nike contrast, drawn explicitly in the episode: David ties this to the same "could charge more but doesn't" dynamic from Acquired's Nike episode, but with opposite motives — Nike underprices to protect an image of being accessible to everyone, even though sneakers routinely resell higher on Goat and StockX. Hermès wants the opposite outcome: it welcomes secondary-market premiums on Birkins and Kellys because they reinforce an image of being not accessible to everyone.

Discussion & Boundaries

  • The episode bundles two distinct things under one label: (1) the Veblen-good property itself — rising price stimulating rather than dampening demand, a statement about the shape of the demand curve; and (2) Hermès's additional strategic choice to price below the market-clearing level and leave consumer surplus on the table. Ben calls both "defiance of microeconomics" back to back, but the second is a way of exploiting and amplifying the first, not something the Veblen-good label requires on its own.
  • At least two playbooks exist under the same property: Chanel also sells something like a Veblen good, and its playbook is the more conventional one — keep raising prices to make people want the item more, done "in record amounts" on pieces like the classic flap medium. Hermès explicitly hasn't followed suit. Being a Veblen good, in other words, doesn't dictate aggressive price hikes as the only strategy; the episode places both companies' choices side by side as two different plays on the same underlying property.
  • The motive explanation carries some on-air reasoning, not a confirmed company statement: Ben explicitly parks "why doesn't Hermès raise prices further" as an open question mid-episode ("I think we should keep in the back of our mind the rest of the episode this question") and only closes the loop later using the revenue math. That's closer to the hosts thinking out loud than an official statement of Hermès's motives, and this page records it as such rather than overstating certainty.
  • The boundary condition is about volatility, not an absolute ceiling: the line between "expensive enough to be special" and "gauche" isn't about the dollar figure — it's whether the price swings, especially over a short period, which erodes trust in the good's intrinsic value. That suggests the Veblen effect isn't simply "the more expensive, the better" without limit; predictability of price movement is itself a condition for the effect to hold.
  • The supply-side constraint is a precondition, not a side note: the episode returns repeatedly to the idea that this whole dynamic rests on a deliberately capped production ceiling — artisan training time, the per-site headcount limit, the hours per handmade bag. If supply could easily expand to meet demand, underpricing would stop manufacturing real scarcity, and the Veblen dynamic would have nothing left to run on. That's a structural precondition in the source material, not just marketing language.