Do consumer s tastes differ final 1.7. - HEC

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D O C ONSUMER’ S T ASTES D IFFER? 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 B EKE T INNEBERG 15 19 MARCH 2003
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. B EKE T INNEBERG 16 19 MARCH 2003
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Do consumer s tastes differ final 1.7. - HEC

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