GBA 463 – Eco & Mkt Strategy

Marketing:
Consumer Choice and Demand

Paul Nelson
Paul.Nelson@simon.rochester.edu

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 Agenda

• Multiattribute (MA) Model

• Choice/Preference
• Intuition (pseudo-math)
• Graphs and a little math
• Key differences with microeconomics
• Demand
• Individual
• Aggregate

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 Marketing Focus vs.
Microeconomics Focus
• More micro view of why behavior occurs
• Lower level goods setting: between 2 or more
“items”
• Product “attributes” are key focus
• Same 2 key foundations
• Self-interested pursuit of happiness
• Competition

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 Intuition: Why Soda?
• Why drink/pay for soda?
- caffeine
- sugar / sweet
- advertising
- brand loyalty
- cheap
- brand personality
- cola taste
- bubbles

THESE ARE PRODUCT ATTRIBUTES

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 Why Do You Value Something?
• Attributes => Perceived Benefit (utility)
• Head: “rational” attributes
• Objective
• Subjective
• Heart: “emotional” attributes
• Prestige
• Emotional connection

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 Do You Think About Attributes?

doctor

Lincoln

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 Benefit Components
• How good does the consumer think an item is on the
relevant attributes
• How important is each attribute to the consumer
• Simple example: Perceived Benefit = Benefit ( Attr ) + Benefit ( Attr )
1 2

• Even simpler linear example: Perceived Benefit = w1 Attr1 + w2 Attr2

If 'cola-ness is an attribute

Benefit Benefit

Attribute Level Attribute Level

caffeine

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Free Soda Choice Problem
• Choose free soda with
greatest perceived benefit
We're interested in caffeine, coolness and low calories. Which one do we buy?

Add up utilities of all three attributes to make decision. So we need to know how caffeinated is each
drink? How cool is each one? How caloric is each one?

8 Caffeine 8 caffeine

9 cool 5 cool

2 lowcal 10 low cal

Despite this, would still choose pepsi. Why? Each attribute may not be equally important.

Multiply and add to find preference (Values in blue shows importance)

When we multiply and add, Pepsi is higher and that is what we would prefer.
Every unit of advantage is worth something different for opposing products.

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 Benefit Comparison (no cost yet)
• Choose A over B if:
1. Perceived Benefit of Item A  Perceived Benefit of Item B
• B ( Attr1A ) + B ( Attr2 A )  B ( Attr1B ) + B ( Attr2 B )
or Benefit of Attribute 1 of product 1 + Benefit of Attribute 2 of product 1 > Benefit of Attribute 1 of product 2 +
Benefit of Attribute 2 of product 2

2. Benefit advantage of Item A > Benefit advantage of

Item B
• If Item A better at Attr1 but not Attr2:
• B ( Attr1A ) − B ( Attr1B )  B ( Attr2 B ) − B ( Attr2 A )
• w1 Attr1A − w1 Attr1B  w2 Attr2 B − w2 Attr2 A
• w1 ( Attr1A − Attr1B )  w2 ( Attr2 B − Attr2 A )

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 Q D

A 3 doll 1 cent

B 1 doll 3 cents

What do we choose? - 3 doll and 1 cent

A 2 quarters 1 dime

B 1 quarter 8 dimes

You would pick B in this case because 8 dimes = 0.8 doll

Therefore 1 attribute may makes up for another bad one.

So you don't always choose the best product - you choose what gives you the most happiness..

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 Cost Components
• Price
• Risk
• Financial
• Product (risk premium)
• Production
• Uncertain perceptions
• Search Costs
• Time
• Financial
• Purchasing Costs
• Taxes
• Delivery/return
• Convenience/speed
• Privacy
• Use Costs For eg: a lot of software companies technically sell the same thing but where they

• differentiate is in the help function (how the front-end looks, user interface etc.)
Installation
• Training/learning
• Maintenance 11
 Multiattribute (MA) Model

• Consumer Surplus = Benefit – Cost

Attributes Price
• “Other costs” seen as additional attributes not
inherent to the product itself
▪ Risk = trust/familiarity
▪ Search/purchase costs = convenience
▪ Use costs = service

▪ Think of price as a “bad attitude”

▪ Note that search costs also influence the consumer’s
“consideration set” of products
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 Choice:
Maximize Consumer Surplus

CS = Benefit – Cost

Attributes Price

• Consumer chooses the item from their consideration set that maximizes this
surplus
• If consumer surplus is negative for all considered items, the consumer does
not choose any of them

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 Soda Choice Problem
• Choose soda with largest consumer surplus
Pepsi Other soda
7.8 7
Benefit [Price of pepsi] Benefit[Price of other soda]

Do prices change your decisiosn?

Steak Hamburger
Quality is advantage
Price is advvantage

But different people have different preferences.

Which consumer surplus is better?

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 Consumer Surplus Comparison
• Choose A over B if:
1. CSA > CSB (if both CS<0, do not buy either)
• Benefits of A – Costs of A > Benefits of B – Costs of B
2. Benefit and Cost Advantages of A > Benefit and Cost
Advantages of B
• If A better at Attr1 but worse at Price
• ( ) ( ) ( ) ( )
B Attr1 A − C P A  B Attr1B − C P B

• B ( Attr ) − B ( Attr )  C ( P ) − C ( P )
1
A
1
B A B

• w ( Attr − Attr )  w ( P − P )
1 1
A
1
B
P
A B

• Weights AND attribute/price level differences determine choice

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 What is Important in the
Consumer’s Evaluation Process?
• What are the relevant attributes?
• How are you and competitors perceived on these
attributes and price?
• What are the tradeoffs among the attributes and price
(e.g. weights w1 , w2 , w3 ...)?

CS = Benefit - Cost
CS = B ( Attr1 ) + B ( Attr2 ) − C ( Price ) Examples: doctor,
employer, vendor, see
CS = w1 Attr1 + w2 Attr2 − w3 Price practice problems
MA practice

MA w/o

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 Sterling Archer has once again lost his job as an international spy. The two things
he cares about in a new job are income and management telling him what to do
(supervision). He prefers more to less of income and less to more management
supervision. Given the choice between a financial advisor job paying $15K a
month with a lot of management supervision and a poorly supervised private
detective position paying $8K a month at the Figgis Detective Agency, Archer
chooses to work at the Figgis Agency. Provide a detailed explanation for this
choice based on the multiattribute model.
Pay Supervision

8 Low
Figgis

15 High
Finance

Consumer surplus for being a detective > CS for being a finance guy

Advantage finace job - Pay

However the value of this is less than the value of supervision

In answers: The value of one difference is greater or lesser than the value of another difference

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18
 Evaluation Process:
Does B2B differ from B2C?
Do Services differ from Products?

CS = Benefit - Cost
CS = B ( Attr1 ) +B ( Attr2 ) - C (Price)
CS = w1Attr1 +w 2 Attr2 -w 3 Price

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 Willingness to Pay and MA Model
• Think of CS in $ terms Rent sports

• Consumer choice maximizes CS

CS  CS best alternative
B − P  CS BA
B − CS BA  P
 Pmax = B − CS BA
• Pmax
• Highest price consumer will pay and still buy the item rather than
its best alternative
• Willingness to pay (WTP) or reservation price

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 Simple, Typical Consumer Problem:
Choose X or Y?
• MA setting is identical to microeconomics: Remember
these three slides from Econ Choice lecture

• Does a single unit of X or Y make you happiest given their

prices?
• Max U ( Q , Q , all other goods ) subject to budget constraint
X Y

• This boils down to comparing the consumer surpluses of

the two items (after some math and minor assumptions)
U (1 unit of X ) −  PX
versus
U (1 unit of Y ) −  PY
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 Choose X or Y: Max CS
U ( good ) −  Pgood
1
U ( good ) − Pgood

U * ( good ) − Pgood
Benefit - Cost
Consumer Surplus
 Choose good that maximizes consumer’s CS!

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 Choose X or Y: WTP
• Choose X if Benefit − P
X X  Benefit Y − PY ( this means that CS X  CSY )
• Willingness to Pay:
• Given PY what is highest PX can be and still choose X?
CS X  CSY
• Benefit X − PX  CSY
 What P makes Benefit X − CSY = Px
This P = Willingness to Pay

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 MA Model and Economics
• Consumer chooses/prefers the item that provides
what they believe to be the greatest consumer
surplus (marketers generally call this utility)

• Equivalent to economics choice problem where

choose only one product
• Max U (relevant attributes, all other goods) subject to
budget constraints
• Simplifies (after assuming away income effects) to max U
(relevant attributes, price)
• Choose item that provides maximum utility (consumer
surplus)

U = B1 ( Attr1 ) + B2 ( Attr2 ) − C ( Price )

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 MA Model Key Issues

• Interested not just in what buy but also why

• Factors influencing preference/choice
• Relevant Attributes
• Tradeoffs between the attributes as well as price (tastes)
• Item positions (perceived levels of attributes and price)
• Consideration set
• Differences/Changes in these 4 issues are tied to
differences/changes in behavior!!

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 MA Model: Math & Graphs
• Tie MA model to microeconomic graphical theory
• Maximize U (attributes) subject to budget constraint and
attributes = f (goods)
• Allows combinations of items to be chosen (or not)
• Typically assume one of two functional forms
M
U (attributes) = U ( Z ) = U ( Z )
m m
m =1

Um ( Zm )

Zm 26
 Linear Model
M
• U ( Z ) =  Wm Z m
m =1

Um ( Zm )

Zm

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 Linear Model Estimation
CS = w1 Attr1 + w2 Attr2 − wP Price
y = b1 x1 + b2 x2 + b3 x3

CS A = x1 A x2 A PA
CS B = x2 B x2 B PB
=
CS M = x1M x2 M PM

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 Partworths Model
Um ( Zm )
M Lm
U ( Z m ) = Wml Dml
m =1 l =1

1 if attribute m has level l

Dml = 
0 otherwise
Zm
• Basically allows data to tell you the functional
form
• Generally not linear
• You specify attribute levels and then estimate
utility for each level via dummy variables
• Associated with conjoint analysis sawtooth
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 MA Model Indifference Curves

• U1 ( Attr1 ) + U 2 ( Attr2 ) = constant

Attr2 Attr2

Attr1 Attr1
Indiv 1 Indiv 2

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 Linear MA Indifference Curves

Attr2 Attr2

Attr1 Attr1
Indiv 1 Indiv 2

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 Multiattribute Model:
Budget Constraint
• Ex: 3 brands, 2 attributes, more > less
• Budget constraint: How much of each attribute you can get
by spending your budget

Attr2

Attr1
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 MA Model: Choice
• Different tastes ⇒ different choices
Attr2 Attr2

Attr1 Attr1
Indiv 1 Indiv 2

MU1 P1 MU1 MP2

• Tangency point: = or =
MU 2 P2 P1 P2

• Note these variables refer to attributes not items

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Yoda and Obiwan have decided to stop in at Jedi headquarters and pick up their free
new light sabers. When they get to the armory at headquarters they find that there is a
large variety of light sabers available with different battery lengths and brightnesses.
Both Yoda and Obiwan’s preferences are well represented by a linear utility function.
Since Yoda can’t see too well brightness is most important to him. Obiwan must
constantly keep Sand people from invading his home so he prefers battery length.

a) For Yoda draw a set of indifference curves that reflects his tastes. Why do these
indifference curves imply Yoda will choose a light saber with a lot of brightness?
b) Draw a set of indifference curves that reflects Obiwan’s tastes.

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 MA Model: Own Price Changes

Attr2 Attr2

Attr1 Attr1

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 MA Individual Demand Curve

PA
Attr2

Attr1 QA

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Indiv Demand ⇨ Aggregate Demand
• Exactly like economic choice and demand relationship
• Aggregate Demand = Sum of Individual Demands

P P

Q Q
Indiv Aggregate

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 Demand Shift Factors are
Analogous to Microeconomics
• Income (budget)
• Competitor Price
• Preference is better understood
• Attribute tastes
• Product locations
• Consideration set (alters budget constraint)

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 MA Individual Demand Shift:
Income

PA
Attr2

Attr1 QA

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 MA Individual Demand Shift:
Competitor Price
PA
Attr2

Attr1 QA

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 MA Individual Demand Shift:
Avacados
Preference – Tastes
ConvValue

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 MA Individual Demand Shift:
Preference - Product Locations
If prod A gets better that section of the curve shifts out

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 MA Individual Demand Shift:
marriage
Consideration Set
If someone doesn't knoe sbaout a specific product, they will prob buy all of the other product

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 MA Model Graph: Single Choice
Assuming Equal Prices
• Can’t buy fractions of a good: Alters budget constraint
• Generally assume either all items have same price or
explicitly graph price as a bad attribute

Attr2 Attr2

Indiv 1 Attr1 Indiv 2 Attr1

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 MA Model Graph: Single Choice
Price as “Bad Attribute”
• Can’t buy fractions of a good: Alters budget constraint
• Generally assume either all items have same price or
explicitly graph price as a bad attribute

LOW
Price

Attribute 1

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 MA Model: Single Choice
• Demand Analysis is analogous to general setting
• Individual choice ⇒ Individual Demand
• Demand Shifts occur similarly

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