90 CHAPTER 3 CONSUMER PREF E RE NCE S AND THE CONCEPT OF UTILITY

A P P L I C A T I O N 3.2

Influencing Your Preferences
The theory of consumer behavior assumes that the in-
difference map for a consumer is given exogenously
and remains fixed. In reality, a consumer’s preferences
can change over time, and with age, education, or ex-
perience. Preferences may also change as a result of
actions designed to influence consumer attitudes
about goods and services.
Firms often pay great sums of money for the op-
portunity to influence your preferences by advertising.
For example, for the telecast of the 2012 Super Bowl,
NBC was able to charge an average of $3.5 million for
each 30-second commercial. Why would an advertiser
pay so much? Super Bowl ratings are always high, re-
gardless of how interesting the game is. When ratings
are high, advertisers know their messages will reach
millions of households. In addition, while TV viewers
often find commercials to be an annoyance, that
changes during the Super Bowl. Many viewers look
forward to the humorous and creative ads that com-
panies run during the game. Furthermore, advertisers
get extra publicity from good ads, since the media dis-
cusses Super Bowl ads at great length.
As can be seen in Figure 3.10, Super Bowl adprices
gradually rose over time to the record price in 2012. Ad
prices tend to be higher when a more excit- ing game is
anticipated. For example, prices rose dra- matically for
the 1998 Super Bowl, when the Denver Broncos upset
the Green Bay Packers for the champi- onship of the
National Football League in a very close game. Prices
sometimes decline during a recession, as they did in
2001 and 2002. Despite the severe reces- sion in 2009,
prices rose. As a result, NBC was reportedto have more
difficulty selling all of the commercial slots than in prior
years (both FedEx and General Motors, regular Super
Bowl advertisers, did not buy ads that year). Average
prices may have been higher

Super Bowl Ad Prices

(30-second ad)
$3,500,000

$3,000,000

$2,500,000
Price (2012 dollars)

$2,000,000

$1,500,000

$1,000,000

$500,000

$0
1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Year

FIGURE 3.10 Prices of Super Bowl Television Ads, 1967-2012

Sources: “Super Bowl Ad Rates Soar from 1967 to 2012,” The Salt Lake Tribune, (January 28,
2012), http://www.sltrib.com/sltrib/sports/53397603-77/1967-super-850000-2100000.html.csp
(accessed September 14, 201
 3.2 UTILITY F U NC TIO N S 91

because many ads were sold prior to September 2008,
when the financial crisis because acute and the reces-
sion began to be felt most strongly.
The government and interest groups can also in-
fluence consumer preferences. For example, in 1953
the American Cancer Society issued its own warning
about smoking, when it published a report linking
cigarette smoking with cancer. Some governments re-
quire cigarette producers to place graphic pictures
(e.g., of oral cancer) on packages as a warning to con-
sumers about the dangers of smoking. In June 2009
the Family Smoking Prevention and Tobacco Control
Act was enacted in the United States. It bans promo-
tions and advertising believed to be focused on
youth. It also requires that the top half of cigarette
packs, front and back, have stern health warnings.
Within two years the law requires the Food and Drug
Administration to add graphic warning labels similar
to those used in other countries. Studies by econo-
mists have found that such warnings and advertising
restrictions can have significant negative impacts on
consumer demand for cigarettes.

A P P L I C A T I O N 3.3

How People Buy Cars: The

Importance of Attributes
We began this chapter by discussing one of the choices
you would face as you decide whether to buy an auto-
mobile, the level of fuel efficiency. But you will proba-
bly also care about other attributes of the car you
might buy. Should it be big or small? Should it have a
big engine and lots of horsepower, or should it have a
smaller engine and thus get better gas mileage?
In other words, when you buy a car you are really
buying a bundle of attributes. Just as we can build a
theory of consumer choice among different goods by
means of a utility function defined over those goods,
we can also build a model of consumer choice among
different varieties of the same good (such as automo-
biles) by means of a utility function defined over the
attributes of this good. For example, the satisfaction
that consumers would derive from different brands of
cars could be described by a utility function over horse-
power, gas mileage, luggage space, and so forth. Market
researchers often use this attribute-based approach
when companies attempt to forecast the potential
market for a new product.
Nestor Arguea, Cheng Hsiao, and Grant Taylor
(AHT) used data on prices in the U.S. automobile mar-
ket to estimate what are known as hedonic prices for
automobile attributes.7 A discussion of hedonic prices
is the stuff of an advanced econometrics course, so
we won’t go into the details of AHT’s methods here.
Roughly speaking, a hedonic price is a measure of the
marginal utility of a particular attribute. Given this,
the ratio of hedonic prices for two different automo-
bile attributes, such as horsepower and gas mileage,
represents the marginal rate of substitution between
these attributes for the typical automobile consumer.
Based on AHT’s estimates, the marginal rate of
substitution of gas mileage for horsepower for a typ-
ical U.S. auto consumer in 1969 was 3.79. This means
that the typical consumer would be willing to forgo
3.79 horsepower to get an additional one mile per
gallon in gas mileage. Between 1969 and 1986 the
marginal rate of substitution of gas mileage for horse-
power gradually fell, reaching 0.71 by 1986.

This decline in the marginal rate of substitution ding indifference curve) to another, and at these bun-
of gas mileage for horsepower could reflect changes dles the marginal rates of substitution may differ.
in consumer tastes, or it could also reflect simultane- The key point of this example is that marginal
ous changes in automobile prices, gasoline prices, and rate of substitution is more than just a theoretical consumer
incomes. As we will see in the next chapter, concept. It can be estimated and used to help us un- when changes
in prices and income occur, consumers derstand the trade-offs that consumers are willing to move from one
consumption bundle (and correspon- make between products and product attributes.