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Evolutionary demand: a model for boundedly rational consumers

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  • Marco Valente

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Abstract

The paper is based on the acknowledgement that properties of markets stemming from features of demand are too frequently overlooked in the economic literature, particularly among evolutionary scholars. The overall goal is to show that “demand matters” to understand properly observed properties of markets not only because of its exogenous (i.e. non-economic) features, but also because of aspects of consumers’ behavior that fully deserve to be considered in the domain of economics. The paper presents a general model of the consumer based on a bounded rational decision algorithm. The model is shown to be compatible with available evidence on consumers’ behavior and adaptable for theoretical as well as empirical applications. The description of the proposed model’s components provides the opportunity to discuss a number of issues the importance of which for the analysis of markets of markets becomes evident taking a demand-oriented perspective. Among these, we propose a formal definition of preferences meant as decision criteria used by consumers and distinct from the actual decisions made by consumers at each purchasing occasion. We also highlight the potential role of firms’ marketing in shaping consumers’ preferences, suggesting an endogenous channel of influence on consumers’ preferences which is possibly highly relevant in certain markets. We use the model to show that the proposed model can easily replicate a generic market demand function, with the advantage of more robust foundations and greater flexibility in respect of standard consumer theory. We also show that limiting to consider distributional properties of markets, neglecting the type of demand, may lead to serious errors of interpretation. Copyright Springer-Verlag 2012

Suggested Citation

  • Marco Valente, 2012. "Evolutionary demand: a model for boundedly rational consumers," Journal of Evolutionary Economics, Springer, vol. 22(5), pages 1029-1080, November.
  • Handle: RePEc:spr:joevec:v:22:y:2012:i:5:p:1029-1080
    DOI: 10.1007/s00191-012-0290-4
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    References listed on IDEAS

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    1. Tommaso Ciarli & André Lorentz & Maria Savona & Marco Valente, 2010. "The Effect Of Consumption And Production Structure On Growth And Distribution. A Micro To Macro Model," Metroeconomica, Wiley Blackwell, vol. 61(1), pages 180-218, February.
    2. Devetag, M Giovanna, 1999. "From Utilities to Mental Models: A Critical Survey on Decision Rules and Cognition in Consumer Choice," Industrial and Corporate Change, Oxford University Press, vol. 8(2), pages 289-351, June.
    3. Gallouj, Faiz & Weinstein, Olivier, 1997. "Innovation in services," Research Policy, Elsevier, vol. 26(4-5), pages 537-556, December.
    4. Richard Nelson & Davide Consoli, 2010. "An evolutionary theory of household consumption behavior," Journal of Evolutionary Economics, Springer, vol. 20(5), pages 665-687, October.
    5. Charles R. Hulten, 2003. "Price hedonics: a critical review," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 5-15.
    6. Cowan, Robin & Cowan, William & Swann, Peter, 1997. "A model of demand with interactions among consumers," International Journal of Industrial Organization, Elsevier, vol. 15(6), pages 711-732, October.
    7. Franco Malerba & Richard Nelson & Luigi Orsenigo & Sidney Winter, 2007. "Demand, innovation, and the dynamics of market structure: The role of experimental users and diverse preferences," Journal of Evolutionary Economics, Springer, vol. 17(4), pages 371-399, August.
    8. J.S. Metcalfe, 2001. "special issue: Consumption, preferences, and the evolutionary agenda," Journal of Evolutionary Economics, Springer, vol. 11(1), pages 37-58.
    9. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    10. Marco Valente, 2009. "Markets fo Heterogeneous Products: a Boundedly Rational Consumer Model," LEM Papers Series 2009/11, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    11. Dennis E. Smallwood & John Conlisk, 1979. "Product Quality in Markets Where Consumers are Imperfectly Informed," The Quarterly Journal of Economics, Oxford University Press, vol. 93(1), pages 1-23.
    12. Marco Valente, 1998. "Laboratory for Simulation Development," DRUID Working Papers 98-5, DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies.
    13. Steven Klepper & Peter Thompson, 2006. "Submarkets and the evolution of market structure," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 861-886, December.
    14. M. Valente, 1997. "Laboratory for Simulation Development User Manual," Working Papers ir97020, International Institute for Applied Systems Analysis.
    15. repec:rje:randje:v:37:y:2006:i:4:p:861-886 is not listed on IDEAS
    16. Samuel Bowles, 1998. "Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 75-111, March.
    17. Green, Paul E & Srinivasan, V, 1978. " Conjoint Analysis in Consumer Research: Issues and Outlook," Journal of Consumer Research, Oxford University Press, vol. 5(2), pages 103-123, Se.
    18. Saviotti, P. P. & Metcalfe, J. S., 1984. "A theoretical approach to the construction of technological output indicators," Research Policy, Elsevier, vol. 13(3), pages 141-151, June.
    19. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    20. Windrum, Paul & Birchenhall, Chris, 1998. "Is product life cycle theory a special case? Dominant designs and the emergence of market niches through coevolutionary-learning," Structural Change and Economic Dynamics, Elsevier, vol. 9(1), pages 109-134, March.
    21. Pier Paolo Saviotti, 2001. "special issue: Variety, growth and demand," Journal of Evolutionary Economics, Springer, vol. 11(1), pages 119-142.
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    Citations

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    Cited by:

    1. André Lorentz & Tommaso Ciarli & Maria Savona & Marco Valente, 2016. "The effect of demand-driven structural transformations on growth and technological change," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 219-246, March.
    2. Leonhard K. Lades, 2012. "The impact of differential satiation dynamics on changing consumer behavior, wellbeing, and innovative activity," Papers on Economics and Evolution 2012-16, Philipps University Marburg, Department of Geography.
    3. Rengs, Bernhard & Scholz-Waeckerle, Manuel, 2017. "Consumption & Class in Evolutionary Macroeconomics," MPRA Paper 80021, University Library of Munich, Germany.
    4. Andreas Chai, 2017. "Tackling Keynes’ question: a look back on 15 years of Learning To Consume," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 251-271, April.
    5. Tommaso Ciarli & Andre Lorentz & Marco Valente & Mario Savona, 2017. "Structural Changes and Growth Regimes," SPRU Working Paper Series 2017-12, SPRU - Science and Technology Policy Research, University of Sussex.
    6. repec:spr:comaot:v:23:y:2017:i:3:d:10.1007_s10588-016-9230-4 is not listed on IDEAS
    7. Anaïs Carlin, 2013. "Modeling Luxury Consumption: An Inter-Income Classes Study of Demand Dynamics and Social Behaviors," GREDEG Working Papers 2013-13, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis, revised May 2014.
    8. Leonhard Lades, 2013. "Explaining shapes of Engel curves: the impact of differential satiation dynamics on consumer behavior," Journal of Evolutionary Economics, Springer, vol. 23(5), pages 1023-1045, November.
    9. Carlos M. Fernández-Márquez & Francisco Fatas-Villafranca & Francisco J. Vázquez, 2017. "A computational consumer-driven market model: statistical properties and the underlying industry dynamics," Computational and Mathematical Organization Theory, Springer, vol. 23(3), pages 319-346, September.
    10. Eric Brouillat, 2015. "Live fast, die young? Investigating product life spans and obsolescence in an agent-based model," Journal of Evolutionary Economics, Springer, vol. 25(2), pages 447-473, April.
    11. João Bernardino & Tanya Araújo, 2013. "On positional consumption and technological innovation: an agent-based model," Journal of Evolutionary Economics, Springer, vol. 23(5), pages 1047-1071, November.
    12. Thiago Caliari & Ricardo Machado Ruiz & Marco Valente, 2016. "Heterogeneidade Da Demanda E Inovação De Produtos," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 135, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    13. Ciarli, Tommaso & Valente, Marco, 2016. "The complex interactions between economic growth and market concentration in a model of structural change," Structural Change and Economic Dynamics, Elsevier, vol. 38(C), pages 38-54.
    14. Arfaoui, Nabila & Brouillat, Eric & Saint Jean, Maïder, 2014. "Policy design and technological substitution: Investigating the REACH regulation in an agent-based model," Ecological Economics, Elsevier, vol. 107(C), pages 347-365.
    15. Stephan B. Bruns & Alessio Moneta, 2017. "Intertemporal propensity to consume," Journal of Evolutionary Economics, Springer, vol. 27(2), pages 295-314, April.
    16. Carlos M. Fernández-Márquez & Francisco Fatás-Villafranca & Francisco J. Vázquez, 2017. "Endogenous Demand and Demanding Consumers: A Computational Approach," Computational Economics, Springer;Society for Computational Economics, vol. 49(2), pages 307-323, February.

    More about this item

    Keywords

    Evolutionary economics; Consumer theory; Bounded rationality; Marketing and preferences; Simulation models; Market structure; C63; D11; D81; L10; L15; M30;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • M30 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - General

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