Advertising, goodwill, and the Veblen effect

The increase of demand in price, an exception to the law of demand, is known as the Veblen effect. In this 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. Incorporating this dynamics into firms' decisions has a promising impact on long-term profit. Consequently, it may even trigger a slew of studies on product line extension, competition and pricing by allowing firms to control their status. (C) 2020 Elsevier B.V. All rights reserved.

Automated summary

The Veblen effect, where price and demand move in the same direction, is an exception to the law of demand. This study shows that advertising and goodwill play a crucial role in making the Veblen effect more prevalent than expected, with promising implications for long-term profit growth. Including this dynamic into firms' decisions may lead to further research on product line extension, competition, and pricing strategies.