Do consumer s tastes differ final 1.7. - HEC

Beke Tinneberg
Macroeconomic Modelling
June 2003
Professor Jean-Christian Lambelet
Assistant: Alexander Mihailov
D O C ONSUMERS’ TASTES D IFFER?

Table of content
Table of content................................................................................................... 1
Introduction.......................................................................................................... 2
Utility Theory and Preferences.............................................................................. 3
ANALYSIS OF MARGINAL UTILITY ................................................................................................................... 3
ANALYSIS OF INDIFFERE NCE CURVES............................................................................................................... 3
ANALYSIS OF REVEALED PREFERENCES ............................................................................................................. 3
Literature and preferences.................................................................................... 5
S. SELVANATHAN: A SYSTEM-WIDE ANALYSIS OF INTERNATIONAL CONSUMPTION AND TRADE........................................ 5
CLEMENTS/CHEN: FUNDAMENTAL SIMILARITIES IN CONSUMER BEHAVIOUR................................................................ 8
G.S. BECKER: ACCOUNTING FOR TASTES...................................................................................................... 12
Personal capital......................................................................................................................................................................13
Social capital...........................................................................................................................................................................13
Other possible influence....................................................................................................................................................14
Preference formation ..........................................................................................................................................................16
Conclusion – Becker (1998)..............................................................................................................................................16
Consumer Behaviour Towards Yoghurt in Belgium and Poland: A Survey in Two
Regions - an empirical analysis................................................................................17
Conclusion...........................................................................................................20
Recommendations...............................................................................................21
Bibliography.........................................................................................................22
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Tastes are the same. Are tastes really the same?
D O C ONSUMER’ S T ASTES D IFFER?
Introduction
When talking about taste, we first have to ask ourselves “What is taste?” Our main interest here is to
analyse the meaning of taste as being a
“liking or preference” 1 .
Preferences are a key element in consumer research as they form the basis of purchase intentions,
actual choice and consumption. This is why a lot of research has been done about preferences,
evidently having an important impact on demand. On the other hand, this explains why studies take
actual purchasing behaviour as an indicator for preferences and therefore also for taste.
Just thinking of the variety of different cultures, one would be tempted to say that differences in taste
must exist. By contrast, economists have analysed this issue in the light of demand curves. Most of
them have concluded that tastes are similar.
This is a rather surprising result, considering that consumption behaviour seems to be obviously
different when comparing India with Scandinavia, for example. In which way would taste be assumed
to differ?
1. First, taste should differ across space, like from Asia to Europe.
2. Second, taste could differ across time in the individual life-cycle, as an individual develops and
taste changes with the years.
3. Third, taste may differ across generations, as grandparents, parents and grandchildren have
different preferences.
On the contrary, an argument speaking for a rapprochement of tastes is globalization. The
liberalization of the world market leads to an increased availability of a larger range of products,
available at places they had not been some years ago. This development might induce more and more
similar tastes between cultures.
The question whether tastes differ is also of economic importance for the more and more growing
global trade. In case of slight differences, adapting a product to the specific local circumstances would
be sufficient. In case of severe differences, it might even be better not to introduce a specific product
on another market at all.
The objective of the present paper is to carry out a survey of literature on preference. As preferences
can be expressed by utility functions, the first part of the present paper introduces ways to measure
preferences via utility or consumption. In order to enlighten different possible aspects, theoretical as
well as empirical literature is going to be introduced. Therefore, the second part discusses the
approaches of several authors and the models used. Finally, a comparative study on consumption of
yoghurt in Belgium and Poland provides an empirical example.
1 Oxford Advanced Learners Dictionary, 1989
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Utility Theory and Preferences 2
What are the ultimate reasons for consumption? Clearly, the most important reason is a physiological
need. But once this is satisfied, human beings strive for psychological and physiological well-being,
which might include any satisfaction of non-basic needs or even consumption for prestige reasons.
The development of research on preferences started by analysing consumption behaviour using utility
theory and was further developed to the revealed preference theory, this process is described below.
Analysis of marginal utility
The idea of analysing marginal utility in order to understand consumption behaviour dates back to the
1870s. It is a cardinal measurement of utility, which implies an order of goods and indicates
differences in utility and their relation; for example, one good can be regarded twice as useful as
another one. As this is only the case for very specific goods, this theory might not be appropriate.
Analysis of indifference curves
Pareto (1906) found that it is not necessary to use an ordinal measure, so that it became possible to
replace the cardinal measure by an ordinal one, which implies a subjective evaluation of goods or their
combinations. This change introduces the possibility of establishing an order of preferences. Its
intensity, however, is not determined. The further development has led to the concept of indifference
curves, a geometrical design of ordinal utility.
Although this approach has been developed by including more subjective measures, it is not yet
perfect. Weak points for example are the non-observability of utility, the assumption of perfect
information of individuals, the fact that isolated individuals are analysed and are considered to only be
influenced by price and income. Additionally, the hypothesis of utility maximisation has not been
confirmed in empirical results and it is assumed that indifference curves are commonly known in order
to derive individual demand curves.
Analysis of revealed preferences
Samuelson (1938) has introduced a new approach to preferences: he derives a consumer’s demand
not from utility aspects, but from decisions taken on the marketplace, therefore being called
behaviouristic or revealed preference theory. Up to now it is the only theory trying to respect an
empirical verification of results.
Even though indicating an ordinal scale, the revealed preference theory is aiming at avoiding both
cardinal and ordinal measures, focusing on observable indicators like income, prices and bought
amounts of goods.
The subject being analysed is the household, considered as a decision- making unit. The household
will consume a certain amount of material or non-material goods (services, rights,…), the amount
being constant over the timeframe of the observation. The household has a specific income, which
does not vary during the observation, but may change from situation to situation. The subject wants
to reach a maximum level of satisfaction with a given level of income.
The revealed preference theory reckons that a consumer’s demand behaviour gives information on his
structure of preferences; the reasons for favouring one good or a combination of goods are not of
interest. Given the purchasing decisions, the household’s preferences are deducted. A preference is
interpreted as observed behaviour; an assumption of a correspondence of consumer behaviour and its
system of values is considered superfluous.
2 This section summarises A. Ihnen, Die Revealed Preference–Analyse – Darstellung und kritische Würdigung, 1983, giving further
explanations from Varian, H.R., Intermediate Microeconomics: A Modern Approach, 2nd ed., 1990, Norton International Student Edition
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To illustrate this approach, one can refer to a product, which is revealed preferred to another one as
the observation of it being chosen over the other one, although it was affordable.
Figure 1
In figure 1, X was observed to have
been chosen over other product
bundles in the dark shaded area,
which are therefore considered as
worse bundles. Y and Z were
observed to have been chosen over
X, and are therefore considered
revealed preferred to it. All the
weighted averages of Y and Z can
also be seen as revealed preferred to
X. Therefore, the indifference curve
must lie somewhere in the region
between the two shaded areas.
Consequently, this approach provides
a possibility to trap the indifference
curve quite tightly simply by using
observations rather than any specific
measure.
Even though the revealed preference
theory is the most modern one, there are still some weak points to be identified. As only a single
household is analysed, the revealed preference analysis does not give any implications on a general
market demand function. And in fact, it does not lead to conclusions additionally to the ones already
found by the first two theories.
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Literature and preferences
As preferences can be inferred from purchasing decisions according to the revealed preference theory,
it seems evident that Japanese buy fish and Americans buy meat simply because they prefer to eat fish
or meat. Does this imply the existence of a representative consumer?
The existence of a representative consumer would mean
that there is a small standard deviation between
preferences of subjects within a country, but a significant
difference can be found when comparing several
countries.
To go deeper into this question, it is necessary to analyse
countries’ data and their consumption behaviour.
Studying distribution patterns and in particular the
underlying standard deviation will allow to draw more
precise conclusions.
Figure 2
First, the analysis done by Clements and Chen (1996) will
be compared with the one conducted by Selvanathan
(1993). Second, a different approach proposed by Becker (1998) is going to be discussed.
S. Selvanathan: A System-Wide Analysis of International Consumption
and Trade 3
Selvanathan compares 4 different models, in 15 OECD countries and with 10 commodity groups. 4 The
models are
1. Individual country model
2. Common demand model
3. Formally pooled demand system
4. Theil’s cross-country demand system
1. Individual Country Model
The first model introduced by Selvanathan is the individual country model, based on the Working’s
model, therefore considering that the budget share for food is a linear function of the logarithm of
income 5 .
This model uses different demand systems for each of the fifteen countries, therefore allowing the
consumers in the different countries to be idiosyncratic, as all the parameters may differ across
countries. The model has built in the restrictions of homogeneity, symmetry and preference
independence.
3 This paragraph summarizes Selvanathan, S., A system-wide analysis of international consumption and trade, Advanced studies in
theoretical and applied economics, Vol. 29, Kluwer Academic publishers, Dordrecht, Netherlands,1993
4 food, beverages, clothing, housing, durables, medical care, transport, recreation, education, miscellaneous
5 This observation was generalised by Leser (1963) to a complete set of commodities with ✍i, ✎i as constants:
wi i i
ó
= α + β log M
representative consumer
✍i is interpreted as the budget share of i per consumer, income M=1 for the poorest country, wi=1,
✍i =1 and ✎i =0
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2. Common Demand Model
The common demand model provides an informal analysis of the extent to which the estimates of the
individual country model differ across countries and will provide some preliminary evidence regarding
the similarity – or lack thereof – of consumers.
As the weighted mean of the income coefficients and of the income flexibility 6 are not too different
from their unweighted counterparts of model 1, it can be suspected that weights do not seem to play
a vital role.
A plotting of income coefficients and their weighted means and of income flexibility and its weighted
means give a clear result: among the 165 points in the 11 plots, all except 8 lie within the twostandard
error bands constructed using the root-mean-square- error (95% lie within the bands). This
finding points in the direction of similarity of consumers in the countries, as measured by the
coefficients i β and φ .
3. Formally Pooled Demand System
The third model directly includes the hypothesis of similar tastes as it specifies that the coefficients of
the demand equations, the demand parameters, are the same in all countries. The data is being
pooled to estimate a common system for all 15 countries, i.e.
commodities and c = 1,...,15 countries.
c
β i = i β
c
φ
=
φ
, with i = 1,...10
c
α
As the constant terms i take account of non-economic factors, they have a different status and
therefore Selvanathan allowed them to vary across countries. The error terms are assumed to be
normally distributed with zero means and independent over time and countries.
In other models, a comparison of data from individual countries was rather difficult, as it was
expressed in national currencies, being converted to a common currency, using prevailing exchange
rates or purchasing power parities. Selvanathan expresses prices, quantities and incomes in logarithmic
change-form. The changes are unit-free and therefore can be pooled internationally.
When running a likelihood ratio test, here testing the similarity of the individual-country estimates
(model 1) and their standard errors with this unrestricted model, the test confirms the similarity of the
pooled estimates and the weighted means.
The finding that ninety-five percent of the individual-country estimates lie within the two-standarderror
bands and that the pooled estimates are very close to the weighted means, implies that the
pooled estimates are not too different from those of the individual country model. Since additionally
the estimates from model 2 and 3 are not significantly different from one another, Selvanathan
concentrates on model 3.
A too high value for ✪² is obtained on the basis of the likelihood test, making it impossible to accept
the pooled model. This is a puzzling result, but Selvanathan suspects that the asymptotic test is not
performing satisfactorily, as it has also been found to be the case for homogeneity and symmetry
testing. As the author uses the hypothesis of preference independence, where goods do not interact
in the consumer’s utility function, the utility function is additive. In contrast to previous tests,
Selvanathan’s is distribution-free and does not rely on asymptotic theory. Therefore, the pooled model
does not need to be rejected due to the results of the likelihood ratio test.
4. Theil’s Cross-Country Demand System
The fourth model that Selvanathan uses to clarify consumer behaviour, is a model used by Theil (1987)
where countries play the role of time periods, so that now the unit of observation is countries,
whereas before it was years. Another major difference is that in his 30-country sample, only 9 of the
15 OECD countries included above are used.
When comparing this model’s estimates with the ones of the pooled model (3), hardly any similarities
are found. Nevertheless, one needs to be aware that the models are not strictly comparable, as on the
one hand, model 3 has constant terms, which allow for trend-like changes in tastes etc. and Theil’s
6 income flexibility = reciprocal of the income elasticity of the marginal utility of income
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model does not contain any similar terms. On the other hand, the difference in the choice of countries
needs to be considered.
In the case of re-estimating model 3 with the constant terms suppressed in order to ensure a better
comparison, results show closer estimates but differences still remain. Therefore Selvanathan
continues to use model 3 with constant terms built-in, since first, more than seventy-five percent of its
estimates are significant and second, model 3 including the constants tends to be more compatible
with the data than if they are suppressed.
As models 1 and 2 can be expressed by model 3, Selvanathan concentrates on models 3 and 4 in his
conclusion. The two models suggest that consumers in different countries are the same in the sense
that income coefficients and income flexibility take common values internationally. However,
consumers may be country specific as the constant term in model 3 varies over countries, accounting
for differences in non-economic factors, and as the error terms in both models take different values
across countries to allow for unexplained random factors.
Goodness of Fit of the four models
First, the information inaccuracy is calculated as a relation between the observed value of the budget
share of commodity i in year t in country c and the predicted budget share implied by the demand
model. It is equal to zero if the fit of the model is perfect and increases as the fit becomes worse.
A comparison of all four models exposes that except for some small differences the countries have the
same rankings. In other words, the same general patterns emerge whether or not Selvanathan
specifies the parameters of the demand equations to be the same across countries. Therefore he
assumes cross-country similarities of taste.
When taking a closer look at the results, models 2 and 4 show higher inaccuracies than models 1 and
3; interestingly, although using a far more diversified country sample, Theil’s model (4) performs much
better than model 2, which uses only OECD countries. The pooled model (3) is in fact almost as good
as the individual country model (1) when comparing the GDP-weighted and unweighted means. The
increase in inaccuracy with the best result for model 1 with inaccuracy increasing over models 3 and 4
to model 2 is mainly due to an increase of restrictions.
Second, the root-mean squared (RMS) percentage prediction error can be analysed for further
information, giving 100 times the square root of the budget-share-weighted mean of the squared
relative prediction errors of the budget share. Calculating the RMS error for the models, Selvanathan
finds 1.93 percent for the individual country model and 2.02 percent for the pooled model, giving a
deterioration in the quality of the predictions when tastes are taken to be identical of 2.02 – 1.93 =
0.09 percentage points. As this variation is quite modest, it can be taken as another indicator for
tastes being relatively similar across countries. Again, the results obtained for the two other models
are higher. Analysing the lack of fit of the models, no dominating commodity is found.
Third, the influence of the weighing scheme needs to be tested. It can be stated that larger countries
have better fitting demand equations than the smaller ones, so that a higher weight of a country leads
to a lower inaccuracy for its data. Therefore the question is risen of how much the result of similarity
actually depends on the fact that better fitting countries obtain a higher weight? When excluding
either large or small countries regarding total GDP, weights do not have a substantial influence on the
results, thus the weighting scheme plays little or no role in the conclusion that tastes are not too
dissimilar internationally.
Do the Demand Parameters Depend on Income and Prices?
As discussed in the previous paragraph, demand parameters do not seem to vary across countries. In
order to test whether parameters change internationally in response to systematic differences
regarding per capita GDP and relative prices, considered as economic characteristics’ variables by
Selvanathan, an estimation by weighted least squares is conducted. The F-values are insignificant
indicating that income coefficients are not related to income and relative prices. Also the effect of
income on income flexibility regarding the values of the individual country model analysed by an
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estimation by weighted least squares results in insignificant F-values depicting that income flexibility is
independent of real income.
Consequently, income coefficients and income flexibility seem to be unrelated to income and prices.
Additionally, the constancy of these coefficients suggests that they are fundamental parameters
characterizing tastes, which are invariant in a wide variety of economic circumstances.
Another indication of consumers’ similarities on an international level is the fact that ninety-five
percent of the parameter estimates of model 1 lie within the two-standard-error bands of the
estimates of models 2 and 3.
The criterion of information inaccuracy provides good results for model 3, pointing in favour of
consumers being not too dissimilar. Nevertheless, it needs to be clarified that the data relates to broad
aggregates comprising ten commodity groups so that there might be more disparities in taste for
smaller aggregates. Another aspect, which needs to be considered, is the inclusion of unexplained
factors like the constant terms. The assumption of similar tastes has been taken under exclusion of the
influence of these terms, which could in fact be culture, tradition, habits or even specific preferences.
Therefore, unexplained factors need to be used with precaution in order not to influence the reliability
of the model’s results.
Clements/Chen: Fundamental Similarities in Consumer Behaviour7
The authors want to attack the question why for example Asians eat rice and Europeans eat bread,
whether this is due to a different price level, to different tastes or to tradition.
The main difference to the models used by Selvanathan is that Clements and Chen compare two
groups of countries: 18 OECD countries with 13 least developed countries (LDC). The commodities
used are food, clothing, housing, durables, medicine, transport, recreation, and “other”, using the
same categories except beverages and education compared to Selvanathan.
Forces, which could blur the differences, are that barriers to international trade have fallen, e.g.
transport and communication costs, leading to an explosion of world trade, international travel and
migration, supporting the tendency towards homogeneity of consumption patterns in different
countries.
The consumption patterns in the group of OECD countries are compared with those in developing
countries. OECD countries spend relatively less on food (29,59% < 40,44%); these “savings” are
redistributed to housing and transport. An analysis of the Divisia price and quantity variance, which
measure cross commodity dispersion, shows that first, the coefficients of variation are fairly similar in
the OECD and LDC countries and second, the price-quantity correlation is almost exactly the same.
These findings point to important international similarities
Constancy of tastes
Utility maximisation theory usually postulates that tastes are fixed, so that the only observable
variables, income and prices, explain consumption. The hypothesis of stable preferences is tested by
comparing estimates of demand equations for the OECD with those for the LDCs.
Autonomous trends are observed to be fairly close in the two groups of countries, except for
transport. The income elasticity for food is lower in the OECD and for transport a significant difference
has been found. The remaining six commodities show fairly similar elasticities. Regarding price
elasticity, only the differences for clothing and transport are highly significant. The data regarding
transport points to the possibility of fundamental differences between the OECD and LDC countries,
otherwise a surprising degree of similarity in consumer behaviour across widely differing groups of
countries can be suspected.
If observable differences in income and prices are controlled for, then consumption patterns are more
or less the same worldwide; at least at a first approximation differences in taste appear to play no role.
This finding is subject to two qualifications: first, the commodities analysed are broad aggregates and
7 This paragraph summarizes Clement, K.W. and D. Chen, Fundamental similarities in consumer behaviour, Applied economics, 1996, 28,
747-757
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second, the analysis deals with groups of countries. Nevertheless, it does not seem to matter, how rich
and poor countries are defined, and the lack of systematic differences in demand parameters across
countries also seems to be quite robust. The authors are therefore confident that the results are not
just an artefact of the grouping of countries into OECD and LDC.
Food Consumption
In most countries, food dominates the budget of all consumers (30% OECD, 40% LDC) 8 , giving food
the position of being the largest single commodity and thus the most important one. Therefore
Clements and Chen conduct an analysis of 43 countries and time-periods 9 restricted to the commodity
food.
As a first analysis, the Working’s model is discussed 10 :
w = α+ βlog
M
The scatterplot in figure 3 reveals
Zimbabwe as an outsider. For the
following analyses, the authors omit
Zimbabwe. Seen the differences among
the 42 countries, the R² associated to the
equation is impressingly high with a value
of 0.84. A re-estimation allowing for
heteroscedasticity does not change the
results appreciably.
Second, the authors generalize the above
equation to obtain
A Box-Cox-transformation of income with
the parameter ë has been used.
λ
λ − 1
=
λ
M
M
A Box-Cox Transformation is a
transformation, which depends on a
parameter, which can be estimated from
data and is used for the specification and
the choice of a function of econometric
equations of models. It contains the linear and the logarithmic regression models as particular cases.
Clements and Chen consider 4 special cases: first, the case of ë striving towards zero when the
generalisation becomes Working’s model, second, the case of ë = -1, leading to the equation of the
Linear Expenditure System (LES), third, ë = 1 refers to the equation equivalent to the quadratic
expenditure system11 , and fourth, ë = -2 implies that expenditure on food is homogeneously linear in
income and it is reciprocal.
All four models have similar values for è 12 Figure 3
, except for the linear reciprocal model with a negative result
for è, implying that food is an inferior good leading to the conclusion that model 4 is implausible.
As a third analysis, the authors test, whether the four special cases of the model lead to a significant
reduction of goodness-of-fit by a likelihood ratio test with maximum likelihood estimate, when ë is
treated as an unknown variable. The test statistics follow an asymptotic ÷² distribution with one
degree of freedom. All except one are significant (Working’s model = 0,42) and are rejected due to
8
the difference can be explained by the strong version of Engel’s law: when income doubles, the food budget sahre declines by 10
percentage points (Theil et al. (1989))
9
USA, Switzerland, Canada, USA*, Australia, Sweden, Denmark, France, Norway, UK, Germany, Japan, Israel, Italy, Belgium, Austria,
Australia*, Hong Kong, Sweden, Netherlands, Finland, Iceland, UK*, Singapore, Spain, Mexico, Israel*, Italy*, Puerto Rico, Malta, Puerto
Rico*, Ireland, South Africa, Colombia, Taiwan, Korea, Greece, Panama, Thailand, Sri Lanka, Zimbabwe, Thailand*, Korea*, an asterix (*)
indicating a second period for a country
10
w = budget share of food, M = per capita GDP
11
Pollak and Wales (1978) , the authors inspired Selvanathan to conduct his analysis, as they rejected H° of identical tastes with this model
12 è = marginal share of the price and quantity of food consumed
w =
γ + δM
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(λ )

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significant ÷² values. Clements and Chen are unable to reject the Working’s model, it can be therefore
seen as dominant and additionally it is not significantly different from the more general Box-Cox-case.
A possible defect of the Working’s model is that the budget share is a linear function of the logarithm
of income so that the predicted budget share can fall outside the [0,1] interval for sufficiently high or
low levels of income.
Food income elasticity
Clements and Chen then discuss how food elasticity changes with income. The Working’s model’s
food income elasticity agrees with intuition. The elasticity ranks from 0.8 for the poorest country
(Korea) to 0.2 for the richest (USA), with an average income elasticity for food of the OECD countries
being smaller than of the LDC.
For an estimation by least squares (model 2) however, the elasticities move in the wrong direction, in
some cases an elasticity for rich countries of equal or higher than one has been found, indicating that
food is a luxury. For the quadratic model (model 3), elasticities decrease too much with income so that
food should be considered as an inferior for the six richest countries. As for the last two models, the
change in value of the food elasticities are properties of the underlying models and not data
dependent, they must both be considered as implausible models.
In the last paragraph of their article, the authors find a “striking empirical regularity in the food price
elasticity of demand” 13 after having compared the Frisch, Slutzky and Cournot own-price elasticities.
As a conclusion of their research, Clements and Chen find that differences in price and income largely
explain differences in consumption patterns.
13 p.755, Clements and Chen (1996)
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S. Selvanathan: A System-Wide Analysis of International Consumption and Trade - overview
Model Sample Remarks
Model 1
Individual
country model
Model 2
Common
demand
parameter
Model 3
Formally
pooled
demand
system
Model 4
Theil’s crosscountry
demand
system
15 OECD
countries
10
commoditygroups
30 countries,
(9 of OECD)
the same 10
commoditygroups
model is based on the Working’s model
parameters take different values for each country,
allowing consumers to be individual
model uses the weighted averages of parameter
estimates of model 1
informal analysis estimating the extent of differences
across countries from model 1
assumption: same consumption behaviour in different
countries (income coefficients and flexibility take
common values internationally)
tests confirm similarity of pooled estimates and weighted
means (model 1), same general patterns show up,
independently of specifying the demand parameters to
be the same across countries or not
assumption (as in model 3): same consumption behaviour
in different countries
Income and
relative
prices
income
coefficients
and income
flexibility are
not related to
income and
relative prices,
their
constancy
suggests them
being
fundamental
and mainly
invariant
parameters
characterizing
tastes
Conclusion
tastes are
assumed
to be
similar
across
countries.
Clement, K.W. and D. Chen: Fundamental Similarities in Consumer Behaviour – overview
Comparison of two groups of countries: 18 OECD countries with 13 LDC, 8 commodities
Specific tests regarding the commodity food (largest commodity)
Model 1
Model
Working’s model
Model 2
Estimation by least
squares
Model 3
Quadratic model
Model 4
Linear reciprocal
model
Goodness of
fit
likelihood ratio
test: unable to
reject model
models rejected
due to
significant ÷²
values.
Remarks
change in the value
of food elasticity
reflects properties of
the models, i.e. they
are general and not
data dependent.
emits a negative
result for è 14 (= food
is an inferior good)
Income and
relative prices
food income elasticity agrees with
intuition (decreasing from 0.8 for the
poorest country (Korea) to 0.2 for the
richest (USA))
elasticities move in the wrong direction,
showing an elasticity for some rich
countries 1 (= food is a luxury)
elasticities decrease too much with
income, food is inferior for the six richest
countries
Conclusion
dominant
model (of
the 4
examined)
implausible
model
implausible
model
implausible
model
Results:
surprising degree of similarity in consumer behaviour across groups of countries
conclusion of the study (comparisons of the models above): differences in income and prices largely explain
differences in consumption patterns, which characterize tastes by constant structural parameters
14 è = marginal share of the price and quantity of food consumed.
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G.S. Becker: Accounting for Tastes 15
D O C ONSUMER’ S T ASTES D IFFER?
Becker (1998) introduces an approach, which includes “soft values” like leisure for example. As he is
using a rather abstract approach, he does not really apply a concrete sample, but mainly refers to a
household in an economy.
Contrary to most other authors, Becker (1998) supposes that consumption behaviour has only little to
do with basic biological needs for food, drink, shelter and some recreation. He highlights aspects like
childhood and other experiences, social interaction, and cultural influences.
His view reflects the aim to establish a link between two ways of discussing demand: economic or
political and sociological or anthropological. The first often neglects the structure of preferences; the
second does not use an efficient analytical approach.
To allow a broader approach, Becker (1998) includes two new variables for analysing preferences:
P: personal capital
including the relevant past consumption and other personal experiences
effecting current and future utilities
S: social capital
integrating the influence of past actions by peers and others in an
individual’s social network and control system.
The introduction of the above variables changes the utility function, as it not only depends on the
goods consumed but also on the stock of personal and social capital at that moment. The utility
function itself is time-independent, thus being a stable function over time of the goods consumed and
of the capital stocks. As a consequence, the stability of the utility function is mainly due to the
inclusion of past experiences and social influences.
Hereby Becker (1998) has created a revised utility function, which enhances the power of stable
preferences and utility maximisation as it significantly explains a wide range of behaviour. Utility does
not directly depend on specific goods and consumer capital stocks, but on the household’s objects of
choice, called commodities – such as health, social standing and reputation, and pleasures of the
senses – produced by themselves. Consequently, the variables in this utility function do not purely
consist of ordinary goods, but additionally of advertisements, education, and other determinants of
preferences normally not considered as “goods“.
Households will therefore maximise a utility function of commodities. These commodities that they
produce themselves are not evaluated by the market price, but by a “shadow price”, the cost of
production. These costs include the quantity of the market good used to produce the commodity, the
person’s own time input, and other input-output coefficients. As these numerous and varied
determinants describe the shadow price, prices do take subtle forms.
Another difference to usual models is the definition of a household’s income. Contrary to other
approaches, Becker does not use the real income which is the money income deflated by an index of
the prices of market goods. Instead, he uses a household’s full income, representing the maximum
money income it could achieve by an appropriate allocation of the given prices of commodities. As full
income and commodities depend on various factors, a household’s income can take refined forms.
When considering rich and poor, black and white, less and more educated persons, persons living in
countries with totally different traditions and their different utility functions, Becker uses the approach
that the differences are due to subutility functions which are not similar due to influences of childhood
and other experiences. Their extended utility functions, however, are regarded as similar. In order to
analyze and explain behaviour in a productive way, the extended utility functions are used in the
model and are considered as stable.
15 This section summarizes Becker, G.S., Accounting for tastes, Harvard University Press paperback edition, 1998
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Personal capital
D O C ONSUMER’ S T ASTES D IFFER?
As stated above, personal capital is formed by past consumption or other personal experiences, which
affect current and future utilities. People caring for their future will recognize that their present
choices and experiences will affect their personal capital in the future, which will directly affect future
utilities. This implies that current choices will not only depend on how they influence current utility,
but also future utilities. For example knowing that smoking harms your health will lead to a reduced
demand for smoking, or people might be induced to do more sports in order to stay healthy in the
future.
In economic theory usually constant discount rates on future utilities fixed to each person are
employed, they may differ between persons. Becker (1998) criticizes that this assumption cannot
explain why the discount rate used to discount future utilities changes for the same individual with
time, for example in the process of growing up. The importance laid on future utilities is influenced by
how well one can estimate what the future utilities might be.
On the other hand, individuals may actually have a discount rate with preferences consistent over
time. This is the case when an individual will make a decision either at some point in the future or at
present and knowing what will happen in the meantime. Nevertheless, individuals will sometimes
make mistakes when trying to influence their future capital, as they are not omnipotent.
The above mentioned is a major point distinguishing Becker’s analysis from other ones. In Becker’s
model, the focus is on the direct link between present and future utilities, whereas others rather
concentrate on analysing the stability of utility functions.
Social capital
Social capital is a variable, which has been introduced to capture the social milieu; therefore an
individual’s stock of social capital mainly depends on the choices of peers in his surroundings and
hardly on his own choices. A person’s next period’s social capital is equal to the consumption of social
goods by all persons in his or her network plus the undepreciated portion of his or her current social
capital.
Social capital itself can either raise or lower utility. Someone who is being helped out profits from
positive utility, whereas a teenager might suffer from negative utility when being animated to smoke
because friends smoke, too. This dependence on the behaviour of other people may create important
externalities.
As the social network is given and social capital is mainly influenced by the people belonging to their
surrounding group, a single person has little direct control over the production of its social capital.
Accordingly, the attempt of this single person in a social network to change the amount invested in
social capital, the others’ capital and therefore its own is only slightly affected. However, when most
members change their social capital, investments in social capital may change greatly.
Nevertheless, individuals still have an enormous indirect influence over it: people aim to be part of
networks that they will benefit from rather than being hurt by them. This again creates a tendency for
positive rather than negative utility of social capital.
Another aspect Becker includes in social capital is culture and tradition.
Culture and tradition
Culture and tradition are “shared values and preferences handed down from one generation to
another through families, peer groups, ethnic classes, and other groups.” Just like social capital,
culture may change over time, but slowly. Becker assigns this characteristic to not easily changing
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D O C ONSUMER’ S T ASTES D IFFER?
control mechanisms. Individuals have less control over their culture than over general social capital as
mentioned above. Culture strongly influences preferences and individual behaviour.
Sustainable culture, in turn, depends very much on individual choices and personal capital. Thus a
specific behaviour like cooperation can be sustained more easily without sanctions, if individuals are
habitual and they were cooperative in the past, even if they could gain from uncooperative behaviour.
When considering culture and tradition as part of social capital, there is a danger of creating
interdependence between social and personal capital, which might lead to a less precise result.
Other possible influence
In neoclassical economic analysis, economic outcomes are determined by preferences, technologies
and government policies. They include prices and wages, output growth rates, and the distribution of
incomes. In Becker’s approach, the endogeneity of preferences implies that the economy also affects
tastes regarding goods, leisure and other activities. Accordingly, economic outcomes are determined
by preferences, but preferences equally influence economic outcomes.
Addiction
To introduce addiction into his model, Becker (1998) differentiates between good addiction (good
music) and bad addiction (drugs, e.g. heroin).
On the one hand, positive addiction is examined. A person who has, for example, always listened to
good music will therefore usually develop an even more refined appreciation of good music.
Consequently, relative music appreciation rises with exposure. This is not due to a shift in favour of
music, but to a sinking shadow price as skill and experience in the appreciation of music is acquired
with exposure.
On the other hand, Becker (1998) considers the effects of negative addiction. The long-term effect of
heroin use on euphoric capital 16 might reduce its amount used at younger ages, or even discourage
any use because of the anticipated harmfully addictive affects.
An increase in consumption of a negative addictive good reduces the stock of consumption capital
available subsequently. The shadow price will rise accordingly at all ages. Nevertheless, this does not
indicate that the inputs of goods will fall with age and exposure; they are actually likely to rise with
exposure if the commodity’s demand curve is inelastic.
Thus, the use of drugs would grow with exposure at the same time that the amount of euphoria fell,
if the demand curve for euphoria and thus for drugs were sufficiently inelastic. Consequently,
addiction to drugs (a growth in use with exposure) is the result of an inelastic demand for heroin, and
not the cause of an inelastic demand.
Therefore, if there would be a case where it would not be evident whether addiction is harmful or
beneficial, the elasticity of demand could be applied to distinguish between them. As depicted above,
high elasticity indicates beneficial addiction, low elasticity the inverse. Additionally, we can derive
effects of taxing and punishments like imprisonment. These measures will mainly transfer resources
away from addicts if the goods are harmfully addictive, and for beneficial goods mainly reduce the
addict’s consumption.
One might question the above-mentioned aspects regarding the hypothesis of rational individuals
maximising their utility by anticipating future consequences of their behaviour. Yet, the concept of
addiction introduced here allows addicts to behave rationally as they maximise future utility with
stable preferences. It is important to see that people not only get addicted to alcohol, heroin and
16 “the commodity euphoria is produced with input of heroin, or alcohol or amphetamines”
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cigarettes, but also to work, eating, music, television, their standard of living, other people, religion, a
sport, and many other activities.
Habits
When looking at the process of decision making, Becker (1998) points out that habit can be an
efficient way to deal with moderate or temporary changes in the environment compared to the cost of
searching for information and applying it to the new situation in a utility maximisation decision.
Muellbauer and Pashardes (1992) indicate that if an individual orients its behaviour towards that of a
reference group so that any difference in behaviour would cause a utility loss, the aggregate level
could result in the representative consumer’s habit, where habit is considered as an action or decision
taken in order to avoid adjustment costs.
Advertising
How can we interpret the effects of advertising on taste? Sticking to the approach of Becker (1998), a
consumer is interested in the commodities’ value produced with market goods and other inputs, not
in the goods themselves. The other inputs are for example time or knowledge, the latter being
composed of information gained through advertising as well as a household’s own search. According
to Becker, advertising will therefore lower the commodity price. This implies a larger output for equal
input and hence increases its demand, with respect to the demand for the good used for this
commodity. “Consequently, advertising affects consumption in this formulation not by changing
tastes, but by changing prices.” (Becker 1998)
The difference to conventional models is that they have used the assumption of perfect competition,
where competitors cannot differentiate their product and therefore have no incentive to advertise it,
as the consumer has perfect knowledge about it anyway. In Becker’s analysis, however, imperfect
competition applies. The companies have the possibility to differentiate and use the medium of
advertising to give the consumers the feeling of obtaining more information.
Nevertheless, this way of dealing with advertising seems as if Becker wanted to keep up with the
hypothesis of stability of tastes. It omits some aspects of reality, as it only applies to an existing
product, which will suddenly be marketed, its demand therefore rising compared to a similar product
which has not been advertised.
Innovative products being implemented on the market for example have not been included. These
products will replace other ones that were bought beforehand and therefore do change consumption.
It needs to be discussed whether this can be considered as a change in taste or not.
Fashions and Fads
Fashions and fads 17 seem to contradict the stability of tastes. But when returning to the approach of
commodities, the one produced by consuming fashion goods is social distinction, the buyer wanting
to be considered a leader or at least to distinguish himself from the mass of people. This demand for
social distinction, however, is more or less constant. To maximize this commodity, we need to consider
the budget constraint depending on personal income and the given social environment.
When explaining differences regarding the expenditures on fashionable goods between countries like
India and the United States, Becker (1998) states that distinction is a scarce good, largely being
redistributed among persons. The increase of a persons’ distinction usually requires a reduction in
distinction of another person. Therefore, he expects wealthy countries to spend more on fashionable
goods than poor countries, even though tastes might be the same.
17 Fashion: popular style (of clothes, behaviour, etc) at a given time or place
Fad: fashion, interest, preference, enthusiasm etc. that is not likely to last
Source: Oxford Advanced Learners Dictionary, 1989
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Preference formation
D O C ONSUMER’ S T ASTES D IFFER?
Becker (1998) states that each person is born with limited experiences; new ones will be added during
childhood and by later experiences. By creating addiction, habits and traditions, a human being’s
desires and choices will be influenced. This acquired behaviour will generally stay, even if the
environment changes radically, as the cost of adaptation might be too large.
This behaviour has been observed in major cities, where people not only stick to their habitual food,
but also create communities with members of the same nationality, for example “Little Italy” and
“China Town” in New York City, but also the Irish, German, Indian, etc. communities.
Several economists claim that some people do not behave rationally under certain circumstances.
Becker does not agree, as the economically irrational behaviour of, for example, caring for elderly
parents without having the obligations to do so by social norms or altruism, may still maximize the
person’s behaviour, once guilt or other experiences from the past are included.
Conclusion – Becker (1998)
“The great advantage, however, of relying only on changes in the arguments entering household
production functions is that all changes in behaviour are explained by changes in prices and incomes,
precisely the variables that organize and give power to economic analysis.” (Becker 1998)
But does this approach give a good representation of behaviour? Becker (1998) justifies a specific
behaviour by the utility of a consumed commodity. It seems that any possible influence can be
included to express a variation in the price of a commodity. The approach needs to be applied
carefully, as influences might be overseen, which otherwise could lead to a different result.
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Consumer Behaviour Towards Yoghurt in Belgium and Poland:
A Survey in Two Regions 18 - an empirical analysis
Does the hypothesis of stable tastes after income and price adjustment, resulting from the individual’s
utility maximization behaviour, get confirmed by empirical data? In the present section a study, which
analyses the consumption of a single product, is discussed.
The goal of this study is to identify similarities and differences between Belgian and Polish consumers
regarding the consumer behaviour towards yoghurt. The research first explored the subject in focus
groups in both countries and then administered questionnaires based on the experiences made during
the focus groups in one Polish and one Belgian town with comparable profile. The desired profile were
middle-sized regional provincial capitals, with the 15 to 65 year old as target group.
Reasons for the choice of countries and product:
A dairy product has been chosen as it is of high interest as a research subject due to its characteristics
of change and dynamism. Due to the introduction of milk-quotas and the introduction of the single
market as well as the impact of new trends in food consumption, dairy products are a major topic
within the EU. The dairy sector also seems to outperform all other branches of the food sector in terms
of product development and new product launches.
Yoghurt in particular takes a special position within the dairy sector. In most European countries, its
consumption continuously increased and nearly doubled during the previous decade, mainly due to
the impulses given from multinational food companies, giving the product a new image fitting the
consumption trends.
The Polish dairy market and in particular the yoghurt market shows characteristics of change and
dynamism. In the period from 1990 to 1995, the volume per capita consumption of milk products has
decreased about one fifth. The share of dairy products in food expenditures though has risen
considerably; mainly due to a drastic price increase caused by the removal of state price controls.
Liberalization of food prices and the removal of food subsidies have lead to a reduction of the
household’s real income of about 30-40% in the first quarter of 1990. The transition has resulted in
food consumption decrease and caused significant differences in food levels among various socioeconomic
groups.
Until the reform, the Polish consumer was hardly recognized as being a part of the system in the sense
of is importance as a regulatory force at the aggregate level of demand. As the situation of shortage
disappeared after transition, the production needed to consider the consumer’s preferences more and
more.
In Poland, yoghurt was hardly available in choice and variety before 1990, but the product mix of dairy
products has increased considerably in width and depth through new product development.
Specifically the product line yoghurt has realized the largest increase of product mix depth within the
Polish dairy sector. The current share of domestic market supply is still at 90%, but an increasing
range of products are imported and therefore products are becoming freely available that before
could only be bought on the black market.
To be able to compare the evolution with the consumption in a European country, the authors have
chosen Belgium, as it holds an average position within Europe in terms of quantity of yoghurt
consumed. Its yearly per capita consumption of 11kg in 1996 is about half as much the consumption
of France and Holland, but double the consumption of Great Britain and Italy.
18 Verbeke, W., J. Viaene, Consumer Behaviour Towards Yoghurt in Belgium and Poland: A Survey in Two Regions, British Food Journal 100/4
(1998) 201-207, MCB University Press
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Comparing the two
countries, the average Polish
family spent 37.8% of its
household budget on food,
which is very high compared
to a share of 13.5% for the
average Belgian family in
1996.
Results
Significant differences in
consumer behaviour
D O C ONSUMER’ S T ASTES D IFFER?
between the Belgian and the Polish respondents have
been found. The variables analysed whether respondents
eat yoghurt or not, their consumption frequency and
whether brand determines the choice or not (Figure 4).
The results showed for example that only 4% of the
respondents in Poland did not eat yoghurt, compared to
13% in Belgium. On the other hand, the Belgians were
more regular consumers than the Polish. (In Belgium 1 /4 of
the respondents consume yoghurt daily compared to 1 /3
of Polish respondents having monthly consumption)
For three quarters of the Polish, brands seem to be a
determining factor of choice compared with one half in
Belgium. The respondents were also asked to indicate and
rank three different product attributes according to their
importance as determinants of quality.
Discussion
Figure 4
For the overall sample, the most important attributes
were the product’s taste, its nutritional value and its
naturalness (Figure 5 & 6). When regarding the
differences in evaluating naturalness and dietetic value,
the authors suggest that these deviations in the
perception of quality are caused by different lifestyles of
the respondents.
For all quality attributes except for brand and taste a
significant difference has been found in the weighted
average scores between Belgium and Poland.
To analyse consumer beliefs and attitudes, the
respondents were asked to quantify their beliefs on a
Likert scale with five response categories as indicated
below.
Figure 5
The null-hypothesis assuming that the two independent
samples have an equal mean attitude score has been rejected due to a too large t-value. Additionally,
the average attitude scores differ significantly between Belgium and Poland, except for the naturalness
of yoghurt.
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When it comes to preferences, the authors also
find a significant difference between the citations
like fat or fruit content and texture. Only
yoghurt’s sugar content did not show any
significant difference.
Conclusion on the study
D O C ONSUMER’ S T ASTES D IFFER?
Figure 6b
Figure 6a
This study indicates that significant differences in preference regarding attitude and consumption
behaviour between Belgian and Polish yoghurt consumers actually do exist.
However, a bias may have occurred as the study has been conducted on a restricted sample including
one town of each nation. Another critical point is the choice of product attributes, which was only
based on the qualitative research, revealing these as most important for the customers. Nevertheless,
more economic data should have been included as they ensure a comparison not only based on
preference, but on preferences in relation to the local conditions. Therefore, an inclusion of relative
prices and income parameters would have lead to a more reliable result, especially when considering
the differences of the two markets explained in the first section of this paragraph.
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Conclusion
After having discussed the different models, these seem to clearly predict a similarity of tastes. The
empirical study on Belgian and Polish yoghurt consumption, however, indicates the opposite.
As there seems to be a gap between the models and the empirical results, there is a need to further
discuss different aspects in detail.
The three models cover a variety of aspects. The samples analyze consumption behaviour within a
group of similar countries (Selvanathan), in-between different groups of countries (Clements, Chen)
and third, Becker adopts a more theoretical approach with a rather micro economical view looking at
an individual and its interaction in its social group.
When comparing Selvanathan with Clements and Chen, the Working’s model proves to be the most
adequate in dealing with consumer preferences, no matter which sample has been used.
Becker, however, constructs a new model, including the variables of personal and social capital.
Culture and tradition, are actually said to have strong influence on preferences and individual
behaviour. Considering their definition 19 , one could think that tastes in reality do differ as cultures
differ. Therefore, people from different cultures should not have similar preferences and tastes should
not be stable. Nevertheless, Becker analyzes these differences as being caused by different utilities,
being based on other costs. This allows in return considering the differences as being due to income
and price aspects, confirming the hypothesis of stable tastes.
Becker explicitly states that “[…] advertising affects consumption in this formulation not by changing
tastes, but by changing prices.” Even if the theory therefore seems to prove that differences in taste
are entirely related to differences in prices, this approach needs to be questioned. As any variable can
be included into calculating the price of a commodity, any difference can be plausibly explained by
relative prices. This relation calls for a prudent application of this kind of reasoning.
Another aspect, which is interesting to analyze, is the difference between extended utility functions
and subutilities. As Becker does expect subutilities to be radically different most of the times, an
important question is where the line should be drawn between the two utilities, as this could change
the entire outcome of the study.
When looking at the empirical data, it seems to be proven that in practice differences in taste do exist.
On the other hand, the data has not been sufficiently related to income and price coefficients.
Therefore it cannot be concluded whether differences in taste really exist or whether they are solely
due to an underlying difference in income and relative prices.
Another aspect, which has not at all been treated in the examined literature, is whether the similarity
of tastes can be only attributed to the fact of preferences actually being the same or whether there
might be a “westernization” of the analyzed markets.
Although Becker (1998) has discovered new fields in demand research, he questions the whole
approach:
“The proposition that one may usefully treat tastes as stable over time and similar
among people is the central task of this essay. […] It is a thesis that does not
permit of direct proof because it is an assertion about the world, not a proposition
in logic.”
19 culture and tradition: “shared values and preferences handed down from one generation to another through families, peer groups, ethnic
classes, and other groups”
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Recommendations
In conclusion, I would recommend to conduct a study on an individual product, for example cars as
generic, or a specific food, like meat, fish, rice, potatoes, flour, etc. The research should include
relative prices and income and analyse different countries with cultures that one would primarily
expect to be different, like Asian, European and African countries 20 . Additionally, the sample should
be separated in rich and poor countries in order to include the culture as well as the income aspect in
the same study. A comparison of every single country with all the other countries would also be very
informative. This way one could be more or less sure that most of the important variables are
included.
20 countries could be: OECD: USA, Japan, France and LDC: Mexico, Korea, Sri Lanka
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Becker, G.S. (1998), Accounting for tastes, Harvard University Press paperback edition
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