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Evolutionary demand: a model for boundedly rational consumers

  • Marco Valente

    ()

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

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File URL: http://hdl.handle.net/10.1007/s00191-012-0290-4
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Article provided by Springer in its journal Journal of Evolutionary Economics.

Volume (Year): 22 (2012)
Issue (Month): 5 (November)
Pages: 1029-1080

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Handle: RePEc:spr:joevec:v:22:y:2012:i:5:p:1029-1080
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  1. Pier Paolo Saviotti, 2001. "special issue: Variety, growth and demand," Journal of Evolutionary Economics, Springer, vol. 11(1), pages 119-142.
  2. Franco Malerba & Richard Nelson & Luigi Orsenigo, 2003. "Demand, innovation and the dynamics of market structure: the role of experimental users and diverse preferences," KITeS Working Papers 135, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jan 2003.
  3. Gallouj, Faiz & Weinstein, Olivier, 1997. "Innovation in services," Research Policy, Elsevier, vol. 26(4-5), pages 537-556, December.
  4. 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.
  5. M. Valente, 1997. "Laboratory for Simulation Development User Manual," Working Papers ir97020, International Institute for Applied Systems Analysis.
  6. 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.
  7. 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.
  8. Maria Giovanna Devetag, 2001. "From utilities to mental models: A critical survey on decision rules and cognition in consumer choice," Experimental 0109001, EconWPA.
  9. Nelson, Richard & Consoli, Davide, 2010. "An Evolutionary Theory of Household Consumption Behavior," MPRA Paper 20197, University Library of Munich, Germany.
  10. Green, Paul E & Srinivasan, V, 1978. " Conjoint Analysis in Consumer Research: Issues and Outlook," Journal of Consumer Research, University of Chicago Press, vol. 5(2), pages 103-23, Se.
  11. Tommaso Ciarli & André Lorentz & Maria Savona & Marco Valente, 2008. "The Effect of Consumption and Production Structure on Growth and Distribution. A Micro to Macro Model," Papers on Economics and Evolution 2008-13, Philipps University Marburg, Department of Geography.
  12. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132.
  13. Cowan, R. & Cowan, W. & Swann, P., 1996. "A Model of Demand with Interactions Among Consumers," UWO Department of Economics Working Papers 9609, University of Western Ontario, Department of Economics.
  14. Smallwood, Dennis E & Conlisk, John, 1979. "Product Quality in Markets Where Consumers are Imperfectly Informed," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 1-23, February.
  15. Charles R. Hulten, 2003. "Price hedonics: a critical review," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 5-15.
  16. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  17. repec:rje:randje:v:37:y:2006:i:4:p:861-886 is not listed on IDEAS
  18. 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.
  19. J.S. Metcalfe, 2001. "special issue: Consumption, preferences, and the evolutionary agenda," Journal of Evolutionary Economics, Springer, vol. 11(1), pages 37-58.
  20. 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.
  21. 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.
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