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Reaction to Price Changes and Aspiration Level Adjustments

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  • David Schmeidler

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  • Itzhak Gilboa

Abstract

We claim that preferences of economic agents cannot be assumed given; rather, they are partly determined by the process of trade in the market, by information about the latter and so forth. In other words, preferences determine actions which, in turn, determine preferences. Thus classical tools of analysis such as the neo-classical utility function and the demand curve should be viewed merely as first approximations, which are too simplistic for many purposes. Changing preferences are not restricted to such phenomena as addiction, advertisement and so forth. Rather, for any product a satisficing consumer has an aspiration level, which is subject to change. The consumer's preferences, as reflected in choice behavior, will also change once the aspiration level is adjusted. We illustrate these claims by analyzing two example concerning consumer reaction to price increases. We analyze the effect of aspiration level adjustments on the dynamic pattern of a single consumer's demand, and show that such adjustments generate predictions which do not conform to the neo-classical theory.

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Bibliographic Info

Paper provided by Ohio State University, Department of Economics in its series Working Papers with number 023.

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Date of creation: Jun 1994
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Handle: RePEc:osu:osuewp:023

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  1. Itzhak Gilboa & David Schmeidler, 1993. "Case-Based Consumer Theory," Discussion Papers 1025, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
  3. Gary S.Grossman Becker & Michael Murphy & Kevin M., 1991. "Rational Addiction and the Effect of Price on Consumption," University of Chicago - George G. Stigler Center for Study of Economy and State 68, Chicago - Center for Study of Economy and State.
  4. Becker, G.S., 1991. "Habits, Addictions, and Traditions," University of Chicago - Economics Research Center 91-8, Chicago - Economics Research Center.
  5. Itzhak Gilboa & David Schmeidler, 1993. "Case-Based Optimization," Discussion Papers 1039, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Pollak, Robert A., 1976. "Habit formation and long-run utility functions," Journal of Economic Theory, Elsevier, vol. 13(2), pages 272-297, October.
  7. Bar-Ilan, Avner & Blinder, Alan S, 1992. "Consumer Durables: Evidence on the Optimality of Usually Doing Nothing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(2), pages 258-72, May.
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Cited by:
  1. Lones Smith & Ennio Stacchetti, 2002. "Aspirational Bargaining," Game Theory and Information 0201003, EconWPA.
  2. Philippe Jehiel & Oliver Compte, 2007. "Bargaining with Reference Dependent Preferences," Levine's Bibliography 122247000000001552, UCLA Department of Economics.
  3. Guerdjikova, Ani, 2006. "Portfolio Choice and Asset Prices in an Economy Populated by Case-Based Decision Makers," Working Papers 06-13, Cornell University, Center for Analytic Economics.
  4. Sadiraj, V. & Tuinstra, J. & Winden, F. van, 2004. "Interest Group Size Dynamics and Policymaking (extensive revised version of WP 01-03)," CeNDEF Working Papers 04-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

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