September 06, 2012
Horse 1358 - Pod Machine Coffee and Veblen
I find it fascinating and amusing that Nestle in particular has managed to hoodwink people into making coffee in machines which cost upwards of $170 fashionable and locked purchasers of said machines into buying sub standard coffee at premium rates.
The term in economics for these sorts of goods is Veblen Goods; named after the economist Thorstein Veblen who first wrote about such goods, conspicuous consumption and status-seeking by consumers in his 1899 treatise "The Theory of the Leisure Class".
Veblen Goods are goods which defy the usual trend of demand. Usually people will tend to want to buy more of a good as the price drops. If say tomatoes are on special, consumers will on the whole want to take advantage of conditions whilst their money has greater purchasing power and they will tend to purchase more tomatoes.
Likewise as the price for a good goes up, people will tend to want to buy less of them. After Cyclone Yasi ripped through Queensland in 2010, a lot of the banana crop was totally destroyed and consequently due to bananas relative scarcity, they were supplied at higher prices.
The problem is that consumers don't particularly want to pay higher prices and so the quantity of bananas demanded fell. Bananas are a perishable good and instead of this causing a glut as is the case with most goods and services, a lot of the bananas on supermarket shelves simply rotted and were thrown away.
Veblen Goods on the other hand defy general demand rules in that as price goes up, bizarrely, the quantity demanded also goes up.
The classic example of this was Rolls-Royce in the 1970s. Mercedes-Benz produced the 450 SEL 6.9 during the middle of an oil crisis. At the time it became the world's most expensive car at £38,000 (£168,000 in 2012 terms) . Rolls-Royce responded, not by producing a better appointed or more technologically advanced car, but by simply upping the price of their Silver Shadow II from £35,000 to £40,000 just so they'd have the most expensive car in the world. Perversely, they sold more cars at the higher price.
There is also the story of the iPhone app called "I am Rich" which served no purpose whatsoever but cost $999.99. Amazingly they still managed to sell such a pointless application even though it conferred no benefit to the purchaser, save for having an icon and a splash screen reminding them that they'd spent the money.
According to Thorstein Veblen:
The rich are primarily concerned with wasteful expenditures in order to impress others with their material wealth. They busy themselves with "conspicious consumption".
The thing is with Pod Machine coffee, it really is no different to instant coffee with flavour additives. Pop the top of the pod, and you don't actually need the Pod Machine to make coffee.
The difference between Pod Machine coffee and espresso coffee from a Moka Pot is that because water in a Pod Machine is forced under pressure through the pod, a crema develops on top of the coffee, whereas with drip coffee or a Moka Pot the pressure is either nil or not enough to produce the effect. A Moka Pot will develop the full flavour of the coffee but that is a function of the water being superheated to just over 100°C.
I note that the sorts of people likely to buy a Pod Machine are those people who are vivacious and bubbly and more likely to have people over for coffee anyway. This means to suggest that the benefit conferred by the Pod Machine is the ability to brag and/or be big noted for having the machine. If this is true then a Pod Machine is an aspirational or status good and it might be also true that the people who buy said machines actually don't know that much about coffee anyway. These sorts of people probably buy flavoured and syrupy coffee at Starbucks. I had something to say about that in Horse 1192.
It seems otherwise strange to me as to why you'd want to pay more than $109/kg for coffee when you can buy bricks of Lavazza or Segafredo at the supermarket. Also if you really wanted expensive estate coffee which is produced on a small scale (usually only one plantation) then you'd buy the beans and grind them yourself, although people who do that are just as easily likely to have a full espresso machine and they can sell for over a thousand dollars anyway.
Nespresso use George Clooney in their adverts and to be honest I don't know which movies he's been in but I'm willing to bet that he probably wouldn't either own a Pod Machine or be that impressed by the coffee made by them.
Pod Machine coffee represents the very definition of a Veblen good. Conspicuous? Yes. Status-seeking? Most certainly. Demand which goes upwards as the price goes up? Curiously yes. And all of this for a product which after is all said and done, a hot beverage.
I though about certain fizzy drinks to come up with a more blatant example of a Veblen good but sadly, I failed... aw well:
Posted by Rollo at 22:50