Three Psychological cases have been identified which have strong influence on determining demand for a product. These cases are referred as ‘psychological’ because in each of these three cases psychology prevails over economic considerations.
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A. Bandwagon Effect:
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Sometimes, estimated demand curve for a product can be different from the actual demand curve for the product. At the time of estimation of demand for a product, potential buyers are identified on the basis their willingness to and capability of purchasing the product.
But in reality, it may be observed that some people, when considered in isolation, do not show their willingness to buy that product.
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Naturally, while determining demand for the product they were excluded. But afterwards, when these people who were initially unwilling to purchase the product, feel an urge to own the good by observing some members of his social group (friends, neighbours, colleagues etc.) possessing the product.
Suppose, DD is the estimated demand curve for product X. DD1 is the demand curve for the same product accommodating Bandwagon effect. It is interesting to note that with fall in price of the product, Bandwagon effect becomes stronger and the gap between DD and DD1 widens.
It happens because with fall in price more people purchase the product and as a result, the effect on the non-users of the product becomes stronger and consequently, the actual demand curve deviates more and more from the estimated demand curve.
B. Snob Effect:
Snob effect is the opposite case of Bandwagon effect and it also refers to deviation of the actual demand for product from its estimated demand but in the reverse direction. This deviation takes place as some potential buyers shy away from the product watching other members of their social group to own it.
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While evaluating demand for a product, financially capable persons are asked individually to express their likings for the product depending on various determinants including its price. Depending on their responses, demand for the product is estimated.
But in reality, when the product is actually launched, some of these interested buyers, referred as ‘Snobs’, find other members of their social group to own the same product and since the ‘snob’ customers want to differentiate themselves from the other members of their social group, decide not to purchase that product which the others use.
As price of the product falls, more and more people buy the product, following law of demand, and consequently these ‘Snob’ buyers feel stronger urge to discard the product. As a result of this behaviour, the gap between the estimated demand curve and the actual demand curve continuously widens with fall in price leading to divergence of the actual demand curve from the estimated one.
Let us represent the Snob effect with help of a diagram. Suppose, DD is the estimated demand curve for product X (see figure 3.14). DD1 is the demand curve for the same product accommodating Snob effect.
Here we observe that Snob effect becomes stronger as the price falls. It happens because with fall in price, more people purchase the product and as a result, the effect on the Snob customers becomes more and more intense and consequently, the actual demand curve deviates further from the estimated demand curve.
C. Veblen Effect:
It has been observed that price is not always oppositely related to quantity demanded. Some customers perceive prices as a proxy for quality. Generally, this is applicable for prestige brands. Prestige brands exhibit certain traits. It must be expensive by normal standards, symbolize status and wealth and satisfies emotional desire(s).
For some products, price indicates quality and hence, if price of product falls below the Minimum Acceptable Price or MAP (which is different for different products), potential customers doubt its quality and consequently demand declines. The impact of this psychological case is referred as Veblen Effect.
Apart from prestige products, this effect is more pronounced in some sensitive items like baby food, baby care items, life –saving drug, sophisticated electronic gadgets etc.
When the Veblen effect starts working upon consumers, the actual demand curve rotates in the inward direction pivoting the MAP. Veblen effect can be weak or strong. In case of weak Veblen effect, the demand curve becomes steeper.
As the VE becomes stronger, the curve becomes upward rising up to the MAP and above that price, demand curve behaves normally.
This indicates the fact that a decline in price up to MAP entails increase in demand for the product. But as soon as price falls below the MAP, potential buyers equate fall in price with deterioration in quality and prefer not to buy the product. Figure 3.15 represents Veblen effect.