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Markets fo Heterogeneous Products: a Boundedly Rational Consumer Model

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  • Marco Valente

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, and a re-balancing is necessary to properly account for theoretical and empirical phenomena. We sustain that one of the most relevant reasons for the neglect of the role of demand is the lack of an adequate representation of consumers. This claim is particu- larly relevant for evolutionary economics since its critique to the mainstream approach stopped at the representation of firms. The standard utility maximization approach to consumers? theory is even less defensible than the related assumption of producers? rationality, given the lack of competitive pressure on consumers. As a contribution to this theoretical gap, the paper presents a model for consumer based on the assumption of bounded rationality and inspired to the literature on experimental psychology. The proposed model can be applied to multi-dimensional products/services and relies on intuitive and potentially observable parameters, allow- ing for a wide range of theoretical and empirical applications. Moreover, the intrinsic structure of the model provides a clear definition of preferences, meant as ex-ante decisional criteria, distinguished from post-hoc justification of any decisional result. Though structurally simple, the proposed model is very flexible and allows for a clear exploration of the impact of specific demand features on the produced results. Several experiments show that the model can be successfully applied both to generate standard results and to implement complex configurations such as those of generated by large markets with heterogeneous products. Among the results presented, the most relevant concerns the identification of two classes of market segmentation, generated by the identical suppliers and demand?s ex- ogenous factors, but different consumers? decisional mechanisms. The results produced are observationally equivalent, but are shown to have radically different properties, and are proposed as initial elements of a taxonomy for the classification demand classes, likely to explain common properties across different markets.

Suggested Citation

  • 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.
  • Handle: RePEc:ssa:lemwps:2009/11
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    File URL: http://www.lem.sssup.it/WPLem/files/2009-11.pdf
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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, pages 180-218.
    2. Gallouj, Faiz & Weinstein, Olivier, 1997. "Innovation in services," Research Policy, Elsevier, pages 537-556.
    3. 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.
    4. R. Aversi & G. Dosi & G. Fagiolo & M. Meacci & C. Olivetti, 1997. "Demand Dynamics With Socially Evolving Preferences," Working Papers ir97081, International Institute for Applied Systems Analysis.
    5. David, Paul A, 1985. "Clio and the Economics of QWERTY," American Economic Review, American Economic Association, vol. 75(2), pages 332-337, May.
    6. 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, pages 371-399.
    7. 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.
    8. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
    9. 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.
    10. M. Valente, 1997. "Laboratory for Simulation Development User Manual," Working Papers ir97020, International Institute for Applied Systems Analysis.
    11. Ulrich Witt, 2006. "Evolutionary Economics," Papers on Economics and Evolution 2006-05, Philipps University Marburg, Department of Geography.
    12. 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.
    13. 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.
    14. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74, pages 132-132.
    15. 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.
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    Cited by:

    1. Marcelo De Carvalho Pereira, 2014. "When Competition May Hinder Technologydiffusion: The Case Of Internet Access Services In Brazil," Anais do XL Encontro Nacional de Economia [Proceedings of the 40th Brazilian Economics Meeting] 152, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    2. Marco Valente, 2012. "Evolutionary demand: a model for boundedly rational consumers," Journal of Evolutionary Economics, Springer, vol. 22(5), pages 1029-1080, November.

    More about this item

    Keywords

    Evolutionary Economics; Consumer Theory; Bounded Rationality; Marketing and Preferences; Simulation Models; Market Structure;

    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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