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Reaction to Price Changes and Aspiration Level Adjustments

  • David Schmeidler

    ()

  • Itzhak Gilboa

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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File URL: http://ecolan.sbs.ohio-state.edu/pdf/schmeidler/reaction.pdf
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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. 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.
  3. Itzhak Gilboa & David Schmeidler, 1993. "Case-Based Optimization," Discussion Papers 1039, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. 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.
  5. 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.
  6. Becker, Gary S, 1992. "Habits, Addictions, and Traditions," Kyklos, Wiley Blackwell, vol. 45(3), pages 327-45.
  7. Pollak, Robert A., 1976. "Habit formation and long-run utility functions," Journal of Economic Theory, Elsevier, vol. 13(2), pages 272-297, October.
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