Compare and contrast the neoclassical view of consumer behaviour with alternative theories
Compare and contrast the neoclassical view of consumer behaviour with that of alternative theories with reference to two or three models of the latter
Over the decades, various theories and models have been advanced to explain the concept of consumer behavior and how a business organization can well understand the consumer needs and offer products and services that match and possibly exceed their expectations. Particularly, the neoclassical theory of consumer behavior is one of the widely recognized models that explain the concept of consumer behavior. This paper, therefore critically analyzes the neoclassical theory and compares it to other theories and models that explain the concept of consumer behavior.
1.0 Neoclassical Theory Constructs
This theory fundamentally considers people as consumers; the buyers of products and services. Hulsmann (1999) explains that neoclassical theory assumes that the consumers in the market are faced with choices between different consumption bundles. The consumer’s choice between these bundles is said to be associated with psychological feelings and beliefs, which in turn impact the behavioural choice of the consumer. From a neoclassical perspective, while the consumer actions are based on their preferences, the two elements (action and preference) do exist independently (Mas-Collel, 1995). This is well supported by Hulsmann (1999), who asserts that this neoclassical orientation is different compared to Austrian’s conception of preferences. The author argues that whilst the neoclassical scholars perceives “feeling that influence action” as the commencing point in making a choice, the Australian perceives “action” itself as the commencing point and preferences are perceived as “facts of action” (Hulsmann, 1999; Caplan, 1999). At its core, it is clear the concept of state, action and outcome are treated as primitive by neoclassical economists as well as belief and desire, which are perceived to be intentional states (Jeffrey, 1983).
Neoclassical economists uphold various assumptions regarding consumer behavior tastes and preferences. For instance, monotonicity is one of the assumptions imposed on the consumers. This assumption holds it that “more is better,” and therefore, bundle x would be more preferable to a consumer than bundle y if the x bundle has “more of at least” one product from the y bundle, but having no “no less of any other” (Mas-Collel, 1995). On the same note, the theory also propagates the continuity assumption, whereby consumer indifference between two bundles can be presented in an indifference curve, thereby giving rise to infinitesimal aspect in human decision making. Consumer rationality is another assumption made by neoclassical theorists as they argue that consumers are only perceived to be rational if their preference satisfies transitivity and completeness aspect (Jeffrey, 1983).
1.3 Indifference curves
Owing to the outlined assumptions which include convexity, continuity, monotonicity and rationality, the neoclassical theory consumer indifference curve will be as shown in figure 1 below, assuming the consumer is indifferent about two products a and b.
Figure 1: Consumer indifference curves
According to Long (2006), the indifference sets do not cross (rationality aspect), are not “thick” (monotony aspect), are smooth and convex to the origin (convexity aspect) and are continuous (continuity aspect). Further, Long (2006) continues to argue that consumers strictly prefer bundles with higher indifference curves (X2) as compared to those with lower indifference curve (X0) This brings forth the concept of Marginal Rate of Substitution (MRS), which basically defines the point whereby a consumer is willing to exchange commodity a for b.
1.4 Consumer choice
Unlike other theories, the neoclassical theory takes the prices and consumer income as exogenous variables. According to Varian (1992), whenever a customer’s walks into retail store, they see commodities with different prices and use their income in combination with these prices to make their preferred choice, i.e. consumption decision. Austrian economists have greatly refuted and criticized the neoclassical ways of price setting as well as the ideas of consumers taking prices as given (exogenous), as the latter is basically a price-taking assumption (Sutter, 2007). The Austrians pinpoint that in a given market, the prices are mainly determined by the demand and supply metrics, and hence arguing that consumer’s decision presupposes the same commodity prices which their choice (consumption decision) influence is infinitive (Holcombe, 2009). With regard to consumer behavior, the consumer’s optimal choices are the commodity bundles lying along the individual's budget line, whereby price ratio equals MRC as shown in the diagram above, for products bundles a and b.
1.5 Consumer demand
From a neoclassical perspective, the consumers’ individual demand curves regarding specific products can be summed up to ascertain the aggregate (market) demand for every commodity. By using complementary market supply curves for each of the identified commodities, equilibrium prices, where the demanded quantities equal the supplied quantities of the commodities can be obtained. This axiom of the consumer theory gives a solution set to the individuals’ problem when exchanging, optimizing and interacting in the society.
2.0 Reasoned Action/Planned Behaviour Theory
Developed by Fishbein and Ajezn (1980), the theory suggests that individuals’ behavior is greatly determined by their “intention to perform the behavior.” The theorists further characterize this intention as the function of their attitudes towards their behavior and their subjective norm as well (Clark, 2010; Moksness, 2015). In a market context, the consumption behavior of an individual is, therefore, relative to their attitude regarding consuming a specific commodity. Unlike the neoclassical economic perspective that takes the approach of consumer preferences and indifferences between products, this theory considers intention as the best behavioral predictor.As observable in the conceptual model in figure 2 (below), the reasoned action theory perceives intention as a cognitive representation of an individual’s preparedness to behave in a certain manner, and can, therefore, be considered as an immediate behavior antecedent (Ajzen, 2002).
Figure 2: A conceptual model of the Planned Behaviour/Reasoned Action Theory
(Source: Ajzen, 2002)
While the neoclassical theory uses preference as the focal point in explaining the consumer choice, the planned behavior theory uses intention as the axiom that triggers consumer choice for a particular product. Nevertheless, the neoclassical framework is much analytical and deep compared to the planned behavior theory and encompasses many facets including utility functions demand and the marginal rate of substitution among others.
This is well supported by Moksness (2015) who claims that the individual (consumer) behavior is based on the consumer intention, which in turn is mainly determined by three factors. These include attitudes, norms, and behavioral control. Owing to the arguments in support of this theory, the greater the consumer’s perceived control, and the more favorable the subjective norms and attitude, the stronger the consumer’s intention to purchase a certain commodity (Manstead, 1995). It is no doubt that both neoclassical and planned behaviour theories can be used to explain why a consumer may choose a specific commodity bundle over the others. However, the neoclassical approach is more utilitarian and features the economic concept of marginal rate of substitution as compared to Fishbein and Ajezn’s planned behaviour theory which is more psychology based. A key aspect of this theory is that it predicts’ the consumer’s deliberate behavior by assuming that an individual’s behavior can be planned and is deliberative (Clark, 2010). However, are people’s actions always planned and deliberative?
3.0 Expectancy-Value Theory
This theory is highly related to the theory of use and gratification. Developed by Martin Fishbein (1970), the theory holds it that the human behavior is a function of the expectation that a person has, in combination with the value of the objective towards which an individual is working to achieve (Sparks and Shepherd, 2002). Unlike the reasoned action and neoclassical theories that take a utilitarian and psychological approach in explaining a consumer choice, this theory uses the targeted outcomes to explain the consumer choice. Essentially, this theory can be perceived to hold the notion of using the end results (specific consumer choice) to justify the means, while the neoclassical and reasoned action rely on the means to justify the end result. Therefore, the focus of this theory is basically built on what an individual wishes to achieve, not why they wish to achieve it (Sparks and Shepherd, 2002).
According to Wigfield and Eccles (2000), whenever an individual is faced with one or more outcomes (behaviours), the choice made will automatically be the one that bears the best combination of value and expected success. From a consumption perspective, this theory perceives consumers as goal-oriented beings. As observed in figure 3(below), the people’s actions (behavior) is, therefore, a response to their values and beliefs and are undertake to achieve predefined end results.
Figure 3: Conceptual model of the Expectancy-Value Theory
(Source: Palmgreen 1984)
In one way or the other, this theory adopts same assumptions elicited in the planned behavior theory that people’s behavior can be planned and is deliberative.
Essentially, there is no right or wrong theory as each is based on substantially credible material facts about consumer behavior. Nevertheless, the neoclassical perspective is more practical, analytical, and highly intriguing for economic and consumer behavior scholars who wish to understand the concept of consumer behavior and decision-making when presented with different commodities.
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