MN302_307: Marketing -- Rafael Gomez, 2003

2 Consumer Behaviour: Theoretical Approaches

Students should come away from this lecture with knowledge of the following: Where consumer behaviour fits into the general marketing framework What theory (or set of theories) of human behaviour are most applicable to marketing What the economic distinction between preferences and constraints really means What does the social psychological approach to behaviour add?

Before we get to the theory of consumer behaviour let us see if we can answer a few simple questions from yesterdays lecture: First, what if anything, did our three definitions tell us about marketing? Second, what was the relationship between traditional economic theory and the study of marketing? What three key points or theorems emerged from the discussion of the perfectly competitive framework in neo-classical economic theory? What testable or practical application for marketing managers can we infer from the perfectly competitive view of markets.

2.0 Consumer Buyer Behaviour: The Economic Theoretical Approach 2.1Where does consumer behaviour fit within the marketing framework and this course?
[see figure in slide]

2.2Why is it important to understand consumer behavior (CB) and what is CB exactly?

In a sense, everything an organization does (whether it is private for profit enterprise, a non-profit entity, or a governmental organization) hinges on the assumptions it makes about people. Both about the people that are employed and the people served by the organization. Now in marketing we tend to think only of the for profit private sector, but whether they want to admit it or not, governmental organizations and non-profits also engage in marketing exercises. The goal of marketing is determining wants and satisfying them, and this essentially is what government services are about as well. So, the importance of knowing how people will behave is tantamount to knowing the secret to organizational success? So let us begin with the simplest description of consumer behaviour. Consumer behaviour is simply the individual purchasingconsuming decision (X) of consumer (i).

MN302_307: Marketing -- Rafael Gomez, 2003

That purchase can be the consumption of a good (G) or service (S). This good or service can be both publicly produced (P) or privately (R) produced by organization

(j).
Once again (as we did last week with the theory of perfect competition) Im going to present to you an extreme economic interpretation of consumer behaviour and then well see what implications this has for the marketing decisions of an organization. We will then contrast this economic version with the social psychological approach. 2.3 Tastes and Constraints in Explaining Differences or Changes in Behavior Mini Case Study: Before I give you the analytical tools, I want you to think about why these countries differ in their consumption or purchase of leisure (leisure as defined by the average number of paid days off) and in their tolerance for differing tax rates: Days Off France 32 Germany 28 Netherlands 27 United Kingdom 13 Canada 12 United States 10 Tax rates 70 65 55 44 49 32

2.3.1 The Economic Three Step Solution to Understanding Consumer Behavior Traditionally, economists (if asked) would begin explain CB in three steps: First step is to examine consumer preferences (easier said than done). For practical purposes this just means what a consumer would theoretically prefer absent prices. The second step is that consumers face budget constraints that restrict the quantities or amounts of goods an services that cab be consumed. The third step is to put consumer preferences and budget constraints together to determine choices. Economists accomplish this last trick by assuming that people maximize their satisfaction by combining a set of goods and services. Graphically they are able to do it via the use of indifference curves and budget lines (e.g., figure 4). [Figure 4: ZARA clothes] As with the theory of perfect competition we can arrive at properties of consumer behaviour, but rather than bore you with them, I will draw your attention to one key assumption about the psychology of consumers that you should be aware. It is the principle of diminishing marginal rate of substitution. Put simply, as more and more of one good, service or attribute is consumed, we would expect that a consumer would prefer to give up fewer and fewer units of a second to get additional amounts

MN302_307: Marketing -- Rafael Gomez, 2003

of the first. So as we move along the indifference curve above and the consumption of style increases, the consumers desire for still more style should diminish. Thus he/she should be willing to give up less and less quality to obtain additional style. Question: Where does this principle break down? In other words are there cases where the MRS increases as we consume more of a good or service in question? And what are the reasons why? Second draw constraints budget line == Y = PX + PY Show how shifts in income, prices alter the budget line. 2.3.2 So What Implications can we draw from this simple view of consumer behaviour? Remember that a marketing expert is interested in two things: Different consumer choices across people (this could be two people, or average consumption patterns of nations) and changes in the same consumer over time ( a person or groups). Model 1: CB =f (Tastes, Constraints) = Both are variable. Model 2: CB = f (T , Constraints Change) = Tastes are fixed. Economists think that they can explain everything in terms of prices and income. This has important implications for marketing which we will prove later. Two economists in fact (Gary Becker and George Stigler (1977)) argued that tastes neither change capriciously nor differ importantly between people. This is a pretty radical statement and Im going to present to you some of the implications behind this view. 2.3.2.1 Stability of Tastes and Custom and Tradition We observe stable behaviour. Over time, for example, between 1960-present, the consumption of wine has remained higher in France than in Germany where beer is consumed more than wine. Now what explains these national differences. Well the common sense answer would be that there is a custom of beer consumption in Germany and vice versa in France. But to prove this assertion, we need to prove that prices and incomes (the environment) have not remained stable. In other words, only when we observe stable behaviour in the face of a prolonged or severe changes in environment can we then say that custom or tradition are important factors in determining choices. The economic answer to stable patters of consumer behaviour relies on the cost (price) of decision making. The making of a decision is costly, because in order to make a decision one requires information, and the information must be analysed. Therefore, the price of a good or service has to incorporate the cost of search as well the market price. When a temporary change takes place in the environment, perhaps a price change or income, it generally may not pay to dis-invest in the knowledge or

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MN302_307: Marketing -- Rafael Gomez, 2003

skills that one has acquired. As a result behaviour will appear stable in the face of temporary changes. So returning to our example, concerning wine and beer consumption. What use can this view have to marketing departments? Well, it could be argued that in France people have more information about the quality of wine than beer, consequently they will not switch to beer without (a) a huge increase in information (translation for marketers huge advertising campaign); or (b) a large drop in the market price of beer to counter act the search costs. Now what about permanent or long lasting changes in the environment. For example the shift to a market economy in the former Soviet Union. Typically, one observes a heterogeneous response. The younger generation usually responds to these changes to a greater extent than older persons. Why? The press response is that young persons are more readily seduced away from old customs by the glitter of the Western environment. In the economic interpretation, it has nothing to do with fickle or immutable taste differences between old and young, rather it has to do with the cost to older persons of disinvesting in the knowledge of how to do things under the old environment. The older one is, the fewer the years one has to collect the returns from investments in certain patterns of behaviour. Young persons on the other hand are not so encumbered, not because they are more flexible or adaptable to changes in the environment, they simply have a greater incentive to invest in new knowledge and new skills. Question: So what implications does this have for say a Russian government intent on instilling the virtues of the market upon its population? Should it (a) Engage in a highly visible and expensive advertising campaign aimed at everyone over 40 extolling the virtues of the capitalist system? or should it, (b) Use that same money and invest it in subsidies for training programs, or rent subsidies/controls so as to lower the transition cost of deregulation, increases in state pensions). (c) What would have a bigger impact on peoples commitment to the new regime? A more trivial application (or confirmation) of this theory are the discounts given to seniors for bus travel or movies. If preferences really differed, then there would be no need to lower the price of movie tickets if you were over 65. What you would do is produce movies that catered to that group, or you would engage in publicity campaigns aimed at changing their attitudes. Instead, the price cuts apply to all films. This has very powerful implications doesnt it? It says that we are the same old or young, soviet or western what differs are the incentives we have to behave a certain way or consume a certain good. So, lets move on to an interesting application that we discussed earlier. 2.3.3 So What Explains different National Consumption of Holidays? 11

MN302_307: Marketing -- Rafael Gomez, 2003

Having given you the analytical tools, I want you to think about why these countries differ in their consumption or purchase of leisure (leisure as defined by the average number of paid days off) and in their tolerance for differing tax rates: Days Off France 32 Germany 28 Netherlands 27 United Kingdom 13 Canada 12 United States 10 Tax rates 70 65 55 44 49 32

H = f [Institutions (Law, political parties, unions), Tastes (custom, ideology), Prices (taxes, incomes)] You may retort that it is the legislation that differs in both countries. And I would say fine, then why does the legislation differ? Presumably legislation, in a democratic society, is based on the collective choices of voters. So why have voters in Continental Europe chosen to elect governments who promise increases in statutory minimum holidays, and why have voters in the Anglo-American world chosen the opposite? Well it is simply a matter of tastes and constraints (or what is perceived as a constraint). The simple answer would be that Europeans prefer leisure more than AngloAmericans. They have a greater taste for holidays. The second answer would be that leisure is more expensive in the Anglo-American world and therefore workers take fewer days off. By expensive we dont mean the price of theme parkswhat we mean by price is really the cost of work. In Europe, leisure is cheaper, because work is more expensive. What do we mean? Well income tax rates are higher in Continental Europe. So voters in those countries feel that pressing for changes in more days off is easier than pressing for more tax breaks. Conversely in the US, pressing for legislative changes to statutory minimum days off is more difficult (owing too many reasons like lack of union recognition etc..) so they instead press governments for more tax cuts. What Im arguing is that taxes and days off are two possible choices for voters, in the same way that consumers face choices over goods and services. However, I dont think voters in these countries are inherently different. I think Americans would like to consume 32 days of holidays and I think Germans would like to pay only a 32 percent marginal tax rate. But what is preventing them is the differing constraints faced in both countries. So graphically the first and second answers would be like the following:

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MN302_307: Marketing -- Rafael Gomez, 2003

WD US

WD US

EU

EU

T Fig 1: Same constraints, different preferences prices WD= Working Days; T = Taxes

T Fig 2: Same preferences; different

So the more subtle and less intuitive answer would be that taxes and holidays are tradeoffs. They are not compliments but are substitutes. And in Europe people find it easier to press for working day reductions, and to pay for those they tolerate larger tax rates from their elected officials. But taking that same European and placing him/her in America, and I bet that they would be pressing for tax relief at the expense of lower holidays..

2.4 Consumer Buyer Behaviour: The Social Psychological Approach

Let us begin with the simplest contrast between economic and social-psychological views Economic view assumes that workers/consumers (agents) have fixed preferences are self-interested (like income (y), own preferences independent of others (x)) utility function U ( x, y) firm must find product to satisfy individual i.

Sociology-psychology view assumes that workers (agents) are not exclusively self-interested utility function encompasses many things including other consumers goods U() firm might (try to) influence preferences

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MN302_307: Marketing -- Rafael Gomez, 2003

preferences may change over time firm might induce purchase by socialising agents

In short, contrast between extrinsic motivation (assumed by economists) intrinsic motivation (assumed by social-psychologists)

NB: It may make sense to elaborate the economic view with the social-psychology view by using (broad-minded) utility maximisation models, but this is not standard social psychologists talk about the self (not preferences).

2.4.1 The socialisation process

There are three basic feedback loops. 1. Basic feedback loop: attributions

(1) self-concept

(2) actions

Alternative specifications: 2. Cognitive dissonance theory: This is where people take actions and only later construct reasons for their actions. rationalisations/self-attributions

(2) self-concept

(1) actions

experimental evidence suggests: individuals attempt to justify past effort/actions, effectively changing current self-concept this internal justification occurs especially when there is no external justification

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MN302_307: Marketing -- Rafael Gomez, 2003

See E. Aronson, The Social Animal, Self-Justification 3. The role-person merger : This is where the self-concept is a (fuzzy) set of social roles. others (subjective) attributions

(3) self-concept

(2) actions

(1) social norms

2.4.2 A Cognitive-Processing Model of Consumer Decision Making Now we will look at the psychological model (as opposed to the social psychological approach seen above) of consumer decision making involves two concepts (the environment; and the cognitive process) which are not dissimilar from the constraints and taste approach of consumer theory in economics. [Figure see slide] Psychological explanations of consumer behaviour which emphasize environmental factors are called behavioral explanations. Those which emphasize internal mental processes are called cognitive explanations. You can see in the table below that the behavioral approach is quite close to the strict economic interpretation and its emphasis on constraints, whereas the cognitive approach has a closer resemblance with a branch of economics which is called quasi-rational or psychological economics.

Positions & Assumptions

Emphasis on explaining Role of environment Role of cognitive factors View of freedom & discretion

Behavioral Approach

Cognitive Approach
Mental constructs One influence among many Predominant controlling variables Humans are autonomous, independent centers of action.

Observable behavior (manifest determinants) Predominant controlling variable Mediators All behavior is controlled by environmental factors

Several points need to be raised regarding this rather simple classification system.

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MN302_307: Marketing -- Rafael Gomez, 2003

Notice the resemblance between the behavioral approach and the constraints based approach of economists like Becker and Stigler. Second, intuitively, is this division akin to the saying actions speak louder than words? Third, one can think of situations, experiments, examples of consumer behavior which confirm both views.

So how do we arrive at a way of operationalizing these concepts in order to understand marketing strategy?

2.5

Cognitive versus Behavioral Approaches

The psychological model was aimed at explaining consumer behavior (brand loyalty, choices, etc..). Cognitive approaches emphasize how people store, process and use information and how they create beliefs and form attitudes and values. Behavioral approaches really look at observable associations between behaviors and their environmental stimuli. 2.5.1 Mechanisms of Behavioral Explanation: Are we all Manchurian Candidates? Lets begin with the how behavioral explanations work. The classic work in this field was Pavlov and his explanation of salivation in his pet dog. Salivation is an innate response to the smell of food. Pavlov rang a bell every time the dog was fed the food. Over time the dog came to associate the bell with the smell of food so when Pavlov stopped pairing the bell with the food, the dog still salivated. The bell became what is called a discriminative stimulus in the environment. The above is an example of classical conditioning, which can be defined as a process by which a previously neutral stimulus (the bell) by being paired with an unconscious stimulus) (food) comes to elicit a response (salivation) very similar to the response originally elicited by the unconditioned stimulus. This view of consumer behavior is used to design a number of marketing strategies as we shall see. 2.5.2 Operant conditioning It differs from classical conditioning because the operant behaviours are elicited because of stimuli elicited after the behaviour has taken place. Marketers use this information of human behaviour in designing fixed / ratio schemes: e.g, pizza chain gives a free pizza after 10 purchases; a coffee shop stamps a card overtime you come in and then the tenth time you get a free coffee, etc.,

2.5.3 Applications of Behavioral Principles in Marketing: The Case of Advertising

Q: Why does so much advertising contain so little information about a product? The classic case were the Benneton ads of convict on death row. Why did Benneton do this? Well clearly this isnt about information dissemination. It is about creating a discriminative stimuli rather than giving information to customers about the quality

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