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Case-Based Consumer Theory

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  • Itzhak Gilboa
  • David Schmeidler

Abstract

The neo-classical theory of consumer behavior, while a powerful tool, suffers from some well-known flaws. Specifically, it assumes a highly, often unrealistically rational utility-maximizing consumer and sheds little light on the dynamic nature of consumption decisions. In this paper we make some preliminary steps towards an alternative theory of consumer choices, restricted to the case of repeated "small" decisions. We assume that the consumer is choosing among products, rather than bundles, and that (s)he is a "case-based decision maker." In particular, such a consumer is not necessarily "optimizing" and may be "satisficing' in the sense of March and Simon (1958). The aggregation of choices among products implicitly defines a choice of a "bundle." It turns out that if the "aspiration level" of the consumer is relatively low, (s)he tends to be satisficed and may choose a "corner" solution, which is not necessarily "utility Maximizing" in the classical sense. If, however, the aspiration level is relatively high, the consumer keeps switching among the products, and their relative frequencies converge to an interior point in the bundles space, as suggested by the classical theory under the assumption of convex preferences. Furthermore, in our model we find that the "utility" of a product is closely related to the (limit) relative frequency with which it is consumed. Thus this model offers a new definition of a product's "utility," as a cardinal measure of desirability. To study the effect of changes in market conditions, we propose to incorporate a product's price directly into its utility. According to this view, the consumer does not consider the "utility" of each product (or bundle) as separate from the budget constraint. Rather, the fact that a certain product is expensive is implicitly assumed to alter the experience of consuming it. It follows that the consumer's reaction to price changes is "immediate," and does not require to (implicitly) solve the new optimization problem. Moreover, such a consumer may well respond to price changes without necessarily maximizing his/her utility subject to the budget constraint. Next we study the relationship between the weight attached to the price in the (linear) evaluation of a product and the budget constraint. We show that, under certain reasonable conditions, the total expenditure is a decreasing function of this parameter and it follows that there exists a unique value for this parameter which balances the consumer's budget. Finally, we introduce the notion of the "potential" of the utility function, which is akin to the neo-classical utility function. We model substitution and complementarity effects, which are related to the cross derivatives of the potential.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1025.

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Date of creation: Feb 1993
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Handle: RePEc:nwu:cmsems:1025

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  1. Itzhak Gilboa, 1991. "Rationality and Ascriptive Science," Discussion Papers 943, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Gilboa, Itzhak & Schmeidler, David, 1995. "Case-Based Decision Theory," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 605-39, August.
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Citations

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Cited by:
  1. Itzhak Gilboa & David Schmeidler, 1996. "Act similarity in case-based decision theory (*)," Economic Theory, Springer, vol. 9(1), pages 47-62.
  2. Falmagne, J. -C., 1996. "A stochastic theory for the emergence and the evolution of preference relations," Mathematical Social Sciences, Elsevier, vol. 31(2), pages 63-84, April.
  3. Itzhak Gilboa & Amit Pazgal, 1995. "History Dependent Brand Switching: Theory and Evidence," Discussion Papers 1146, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Ken Binmore & Larry Samuelson, . "Muddling Through: Moisy Equlibrium Selection," ELSE working papers 036, ESRC Centre on Economics Learning and Social Evolution.
  5. David Schmeidler & Itzhak Gilboa, 1994. "Reaction to Price Changes and Aspiration Level Adjustments," Working Papers 023, Ohio State University, Department of Economics.
  6. Gilboa, Itzhak & Schmeidler, David, 1996. "Case-Based Optimization," Games and Economic Behavior, Elsevier, vol. 15(1), pages 1-26, July.
  7. F. de Vries, 1999. "The Behavioral Firm and Its Internal Game: Evolutionary Dynamics of Decision Making," Working Papers ir99036, International Institute for Applied Systems Analysis.
  8. Enriqueta Aragones, 1993. "A Dynamic Model of Multiparty Competition," Discussion Papers 1044, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Blonski, Matthias, 1999. "Social learning with case-based decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 38(1), pages 59-77, January.
  10. Enriqueta Aragones, 1997. "Negativity Effect and the Emergence of Ideologies," Journal of Theoretical Politics, , vol. 9(2), pages 189-210, April.
  11. Enriqueta Aragon├ęs, 1994. "Negativity effect in multiparty electoral competition," Economics Working Papers 273, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1997.

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