Price Dependent Preferences

Abstract

Preferences for goods may depend on because people judge quality by price or because a higher price enhances the of a good. 1 Under some circumstances, judging the quality of a product by its price is a rational strategy for an uncertain consumer; presumably, it will be most satisfactory when other consumers are experts, so that their correct assessments of quality are reflected in the demand curves facing firms and when our uncertain buyer's tastes (although not his knowledge) coincide with those of the experts. In this paper I suggest a mechanism for incorporating price dependent preferences into demand analysis. The basic trick is to distinguish between market prices -the which enter the budget constraint-and prices -the which influence preferences. In the final section I discuss briefly the problem of welfare evaluation when preferences depend on prices, but the focus of this paper is on the implications of price dependent preferences for individual demand behavior. When and normal are treated as distinct and independent variables, the resulting model is extremely tractable. I introduce the market price demand in Section I. They show demand as a of prices, total expenditure, and normal prices. Viewed as functions of and total expenditure, these demand functions exhibit all the properties of traditional demand theory. To complete the normal price model of price dependent preferences it is necessary to specify both the way preferences depend on normal and the process by which normal are determined. The price function specifies normal as a of current and past prices. Our casual understanding of both judging quality by price and snob appeal suggests that the price variables which influence tastes are not simply current prices, but some more complex construct related to past as well as current prices. The normal price is compatible with this insight, although it is also compatible with the two polar specifications in which normal depend exclusively on past or exclusively on current prices. The easiest case is the one in which normal depend on past but not on current prices; in this case the price demand functions are also short-run demand functions. The other polar case corresponds to the usual simultaneous specification of price dependent preferences in which tastes depend on current but not on past prices; in this case, the distinction between normal and is only an analytical one, but even here the use of normal allows us to distinguish the role of as determinants of preferences from their role as determinants of the constraint.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 108 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.