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 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’ mar- keting 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.

Evolutionary demand: a model for boundedly rational consumers

VALENTE, MARCO
2012

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, 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 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’ mar- keting 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.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11697/17904
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