Monday, 8 December 2014

Are sex services in Russia a Veblen good?

The Moscow Times reports (emphasis added):
In the Urals, sex workers have raised prices by between 50 and 100 percent, said Wednesday, citing unnamed clients of prostitutes.
In addition to the falling ruble, the sex tariff inflation may have been boosted by an influx of sex workers fleeing war-torn Ukraine, the website said. The new competition is forcing local sex workers to hike their rates in order to pay their bills, the report said.
So, there is an increase in the number of people supplying sex services (because of the influx of Ukrainian sex workers), and that leads to an increase in the price of sex services? Only if the demand curve is upward sloping. Otherwise, an increase in competition should lead to a decrease in the price (after all, this is one of the reasons that competition is argued to be good for consumers).

Could the demand curve for sex services be upward sloping? It seems unlikely, but there are some types of goods where the demand curve is upward sloping. One of these types of goods is Veblen goods - luxury goods where the price is a signal of the high status of the purchaser. In this case, when the price goes up people the good is an even more powerful signal of high status, and so consumers who are seeking status demand more of the good. To show their high status, the purchasers then want to broadcast their purchase to many people (especially those who are close to them in actual social status) - this is conspicuous consumption, otherwise the signal is worthless. That doesn't seem a particularly likely scenario for sex services. Neither are sex services consistent with other types of goods that have upward-sloping demand (Giffen goods, goods with network effects, goods with bandwagon effects).

More likely, and the Moscow Times have demonstrated temporary economic illiteracy. Increased supply doesn't increase prices. On the other hand, inflation does increase prices and that is what is being observed.

[HT: Marginal Revolution]

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