How real worlds makes choice

How Real World’s Consumer Makes Choice? Hay Nong (Asia Economics Theory Research Center; Tsinghua University） Traditional economics assumes commodity is homogeneous, but in real world’s market, commodity is often heterogeneous in the objective characteristic or attribute, such as house is often heterogeneous in size, computer is often heterogeneous in CPU speed We discovered, in real world’s market, since commodity is often heterogeneous in attribute, then, consumer will make the choice in a two steps two approaches’ way Suppose in the market, there are 40 brands of bread and 30 brands of clothing At the first step, consumer will make a choice by attribute, choosing the best bread by nutrition, and choosing the best clothing by warmth keep ratio At the second step, consumer will make a choice by utility, choosing a bundle of the best bread and the best clothing that has the largest utility We strictly proved this way of choice is rational for consumer Introduction Traditional economics often assumes commodity is homogeneous, and argues consumer will choose a bundle of commodities that has the largest utility under budget constraint (Samuelson et al 2005; Varian 2014, Mankiw 2016) But in real world’s market, commodity is often heterogeneous in the objective characteristic or attribute Such as, in real world’s house market, house is often heterogeneous in size, in real world’s computer market, computer is often heterogeneous in CPU speed Then, to understand real world’s consumer choice behavior, we need analyze how consumer makes choice when commodity is heterogeneous in attribute Some researchers (Lancaster 1966, Tversky 1972, Marmorstein et al 1987, etc.) already analyzed how consumer makes choice when commodity is heterogeneous in the objective characteristic or attribute, but they didn’t set a simple enough assumption, then got limited advancement Such as, Lancaster (1966) etc assumes one commodity is a package of n attributes, and got limited advancement (compared with the advancements gotten by this paper) We found, here, simple is more powerful If we Electronic copy available at: https://ssrn.com/abstract=3923184 assume one commodity has only one attribute, we can get more advancements We find, under the assumption that commodity has only one attribute, the relationship between two commodities will be quite simple, either the two commodities own the same attribute, or the two commodities own different attributes And, in real world’s market, commodities owning the same attribute are often used to satisfy consumer’s the same need, commodities owning different attributes are often used to satisfy consumer’s different needs Then, under the assumption that commodity has only one attribute, consumer’s choices between two commodities can be divided into the following two different types The first type of consumer choice, is consumer’s choice between commodities that own the same attribute and satisfy the same need, such as consumer’s choice between bread A and bread B Bread A and bread B own the same objective attribute, nutrition contained, and satisfy consumer’s the same need, the need of getting nutrition In this type of consumer choice, since commodities have the same objective attribute, then, consumer’s choice logic can be better attribute at lower cost Such as, if bread A and bread B have the same price but contain different amounts of nutrition, consumer can make a choice directly by nutrition, and choose the bread which contains more nutrition In this type of consumer choice, since commodities have the same objective attribute, then, commodities are good substitute to each other, then, consumer will choose one commodity and totally give up the other Such as, between bread A and bread B, once consumer chooses bread A, she will totally give up bread B The second type of consumer choice, is consumer’s choice between commodities that own different attributes and satisfy different needs, such as consumer’s choice between bread and clothing Bread and clothing own different attributes and satisfy consumer’s different needs Bread has the attribute of nutrition and satisfies consumer’s need of getting nutrition, while clothing has the attribute of warmth keep ratio and satisfies consumer’s need of keeping body warm In this type of consumer choice, since commodities own different objective attribute, then, consumer’s choice logic cannot be better attribute at lower cost, and can Electronic copy available at: https://ssrn.com/abstract=3923184 only be higher utility at lower cost Such as, when consumer makes a choice between bread and clothing, consumer’s choice logic cannot be better attribute at lower cost, and can only be higher utility at lower cost In this type of consumer choice, since commodities own different objective attributes, then, commodities cannot substitute each other (at objective attribute level), then consumer will not choose one and totally give up the other, and consumer will choose a certain amount of each commodity Such as, between bread and clothing, consumer will choose a certain amount of each of bread and clothing, and will not choose one and totally give up the other Because, bread and clothing cannot substitute each other (at objective attribute level), without any of bread and clothing, consumer cannot survive Traditional economics assumes commodity is homogeneous, and implies consumer’s choice is a one step one approach choice One step is that consumer directly chooses a bundle of commodities from the market One approach is that consumer makes the choice only by utility (or preference) (see literature review in §3) But, in real world’s market, as analyzed in section 2, consumer often doesn’t make choice in traditional economics’ one step one approach’s way We discovered, in real world’s market, in order to make a good choice at less effort, the rational consumer often makes the choice in a two steps two approaches’ way (see §2) At the first step, consumer will make the choice between commodities that satisfy the same need by attribute (or preferentially by attribute), deciding which to buy At the second step, consumer will make the choice between commodities that satisfy different needs by utility, deciding how many to buy Such as, suppose in the market, there are 40 brands of bread, bread A, B, C, …, and 30 brands of clothing, clothing A, B, C, …… Suppose the 40 brands of bread contain different amounts of nutrition and have different prices, suppose the 30 brands of clothing have different warmth keep ratios and have different prices In this example, there are 40*30 = 1200 possible combinations of bread and clothing According to traditional consumer theory (preference and utility theory), consumer will directly choose a bundle of bread and clothing by utility (or preference), Electronic copy available at: https://ssrn.com/abstract=3923184 among the 1200 possible combinations of bread and clothing It’s obvious that, for consumer, making the choice in this way is a huge and nearly impossible task This paper discovered, in order to make a good choice at less effort, in the real world’s market, the rational consumer will make the choice in the following two steps two approaches’ way At the first step, consumer will make the choice between different brands of bread, finding out the best bread for her (e.g bread C), and make the choice between different brands of clothing, finding out the best clothing for her (e.g clothing D) At this step, consumer makes the choice by attribute or preferentially by attribute, and only decides which bread and which clothing to buy (see §4.2.1) At the second step, after consumer already decided which bread and which clothing to buy (bread C, clothing D), consumer will make a choice between bread and clothing, and choose the bundle of bread and clothing that has the largest utility under budget constraint, such as 30 pounds of bread C and suits of clothing D At this step, consumer makes the choice by utility, and decides how many bread and how many clothing to buy (see §4.2.2) We find, the above two steps two approaches choice is frequently happening in real world’s market (§2) We strictly proved, the above two steps two approaches choice is rational for consumer to make good choice at less effort (§5) The contributions of the paper are two (1) The paper is the first research that strictly distinguished the two different types of consumer choice, at need and attribute level (2) The paper is the first research that discovered and proved the two steps two approaches choice in real world’s market The remainder of the paper is organized as follows Section shows the two different types of consumer choice and the two steps two approaches choice in real world’s market Section provides the literature review Section provides a deeper analysis on real world’s consumer choice Section strictly proves that the two steps two approaches choice is rational for consumer Section shows how to make a good choice by this paper’s consumer theory Section concludes Electronic copy available at: https://ssrn.com/abstract=3923184 Consumer’s Choice Behavior in Real World’s Market Here, we provide two simplified examples from the real world’s market, to show the two different types of consumer choice and the two steps two approaches consumer choice in real world’s market Example A Mike was the newly appointed purchase manager in a steel company, in charge of purchasing iron ore and coke The present budget of Mike is given, million dollars In the market, there are two types of iron ore, iron ore A and iron ore B Iron ore A contains iron element at 62%, the present price is 120 dollars/ton, iron ore B contains iron element at 58%, the present price is 118 dollars/ton There are two types of coke, coke X and coke Y Coke X contains calorie at 7000 kcals/kg, the present price is 200 dollars/ton, coke Y contains calorie at 7100 kcals/kg, the present price is also 200 dollars/ton Mike was newly appointed, and he had limited information about the price and quality of iron ore and coke in market Then, Mike made his choice decision in the following way, actually, a two steps two approaches’ way At the first step, Mike searched the information about the price and quality of iron ore and coke in the market, and decided to choose iron ore A and coke Y, because, among different iron ores, iron ore A contains much more iron element but the price is only a little higher, and, among different cokes, coke Y contains more calorie and the price is the same (coke with more calorie is better for steel company) At this step, under given prices, Mike made the choice decision directly by iron element or calorie, the objective attribute of iron ore or coke For Mike, this step of choice in fact is deciding which to buy At the second step, after Mike already decided which iron ore and which coke to buy, he made a balance between iron ore and coke under budget constraint, and chose to buy 30000 tons of iron ore A and 12000 tons of coke Y, and used the budget up At this step, Mike’s approach of making choice is that ton iron ore requires 0.4 ton coke, a technique requirement of steel company to maximize the output For Mike, this step of Electronic copy available at: https://ssrn.com/abstract=3923184 choice in fact is deciding how many to buy Why Mike’s choice had two steps? Because, only after Mike already decided which iron ore and which coke to buy, he can know how many iron ore and coke to buy, since iron ores or cokes had different prices and qualities Example B In one day, Rose went to the supermarket to buy fruit and tissue for the next week use for her family Routinely, in each week, she bought pounds of brand A apple, and bags of brand X tissue After Rose got in the supermarket, she found there was a promotion of brand B apple Rose seldom buy brand B apple because its price is too high, twice as the price of brand A apple, though it is much sweeter But in this day, because of the promotion, the price of brand B apple was the same as brand A apple, then, Rose decided to buy 10 pounds of brand B apple, two pounds more than she routinely purchased Because Rose often took a just enough money to go shopping, then, after she bought 10 pounds of brand B apple, she reduced the budget of tissue, and bought the tissue of brand Y, which has lower quality and lower price than the originally planned brand X tissue At last, Rose bought 10 pounds of brand B apple, and bags of brand Y tissue Our Findings from the Two Examples The above two examples are very common in real world’s market, and there are numerous phenomena similar to them In the two examples, we can find some important laws and paradigms of consumer behavior hiding behind These laws and paradigms of consumer choice were not discovered enough or even never addressed (1) We can find that, consumer’s choice is a combination of two different types of choice In the two different types of choice, commodities are different in attribute situation, and consumer makes choice by different logic and different approach Such as, in example A, Mike’s choice is a combination of two different types of choice The first type of choice, is consumer’s choice between commodities that satisfy the same need, such as Mike’s choice between different iron ores or Mike’s choice between different cokes The second type of choice, is consumer’s choice between Electronic copy available at: https://ssrn.com/abstract=3923184 commodities that satisfy different needs, such as Mike’s choice between iron ore and coke And, in example B, Rose’s choice is also a combination of two different types of consumer choice In the two different types of consumer choice, commodities are different in attribute situation, then are different in substitution situation In the first type of consumer choice (consumer choice between commodities that satisfy the same need), commodities have the same attribute, then, commodities can well substitute each other, and consumer can choose one and give up the other Such as, in example A, when Mike made a choice between iron ore A and iron ore B, iron ore A and iron ore B have the same attribute, the iron element contained, then iron ore A and iron ore B can perfectively substitute each other, and Mike chose iron ore A and gave up iron ore B In the second type of consumer choice (consumer choice between commodities that satisfy different needs), commodities are different in attribute, then, commodities cannot substitute each other (at attribute level), then, consumer will not choose only one and give up the other, and consumer will choose a certain amount of each commodity Such as, when Mike made a choice between iron ore and coke, iron ore and coke are quite different in attribute, iron ore has the attribute of iron element contained, while coke has the attribute of calorie contained, then, iron ore and coke cannot substitute each other (at attribute level), and Mike chose a certain amount of each of iron ore and coke And in example B, in the two different types of consumer choice, commodities are also different in attribute situation and substitutability In the two different types of consumer choice, consumer’s choice logics are different, and consumer makes choice decision by different approaches In the first type of consumer choice, consumer’s choice logic is better attribute at lower cost1 Such as, when Rose made a choice between different apples, her logic is better attribute at lower cost, and her approach of choice is choosing the apple which In this paper, better attribute at lower cost means consumer will choose the commodity with not worse attribute and not higher price Electronic copy available at: https://ssrn.com/abstract=3923184 is sweeter when apples have the same price Such as, when Mike made a choice between different iron ores, his logic is better attribute at lower cost, and his approach of choice is approximately choosing the iron ore which has higher iron element content/price1 In the second type of consumer choice, consumer choice logic is higher utility at lower cost Such as, when Mike made a choice between iron ore and coke, his logic of choice is higher utility (higher output)2 at lower cost, and his approach of choice is choosing the bundle of iron ore and coke that generate the largest utility (largest output) under budget constraint And, between apple and tissue, Rose’s choice logic is also higher utility at lower cost, and Rose’s approach of choice is choosing the bundle of apple and tissue which has the maximum utility under budget constraint (2) We can find that, in order to make a good choice at less effort, consumer will make a choice decision in a two steps two approaches’ way Such as in Example A, Mike made his choice in a two steps two approaches’ way At the first step, Mike made the choice between different iron ores and made the choice between different cokes, by attribute of iron ore or by attribute of coke, deciding which iron ore to buy and which coke to buy At the second step, after Mike already decided which iron ore and which coke to buy, Mike made a choice between iron ore and coke, by utility (by output of the production), deciding how many iron ore and coke to buy under budget constraint Why Rose didn’t make her choice decision in Mike’s two steps two approaches way? One reason is, when Rose bought the apple, she often already known the price and quality of tissue, then, she can judge the best quantity of apple for her Or here, Rosen can accomplish the two steps two approaches choice only in mind, based on the information she already owned The other reason is, Rose needn’t make a very good choice decision, because it will not hurt her family much if she made a not very scientific purchase decision of apple and tissue But, if Rose was at Mike’s position It’s obvious that, choosing the commodity with higher attribute/price is also a choice under the logic of better attribute at lower cost Here, producer is seen as personal consumer, and for producer, higher output is seen as higher utility Electronic copy available at: https://ssrn.com/abstract=3923184 and situation, she would follow Mike’s way In the following, this paper strictly proved, the above two steps two approaches choice is rational for consumer (see Section 5) The Literature Review Actually, if we observed real world’s consumer choice behavior, we can find that, in the real world, consumer’s choice is often a combination of the above two different types of choice Because, in real world’s market, consumer always has several needs to be satisfied, and, to satisfy each need, there are many commodities being the options, such as, to satisfy consumer’s need of eating apple, there are many brands or many types of apple in the market, then, consumer not only needs to make a choice between commodities that satisfy different needs, but also needs to make a choice between commodities that satisfy the same need Since real world’s consumer choice is often a combination of two different types of choice, and the two different types of choice are different in choice logic, then, an important question arises The question is, in order to make a good choice at less effort, how consumer combines the two different types of choice together? But literature review shows, few and even no researchers addressed how consumer combines the two different types of choice together Economists always focused on consumer’s choice between commodities that satisfy different needs, while marketers always focused on consumer’s choice between commodities that satisfy the same need Economists always Focused on Consumer’s Choice Between Commodities that Satisfy Different Needs When analyzing consumer’s choice behavior, present economists always focused on the second type of consumer choice, consumer’s choice between commodities that satisfy different needs, and use the theory found to explain consumer’s all choices For example, when analyzing consumer’s choice behavior, in their Economics, Samuelson and Nordhaus (2005, 2010)only analyzed consumer’s choice between food and clothing, and based on this built the consumer choice theory Same as Samuelson and Nordhaus, in their Microeconomics, Pindyck and Rubinfeld (2013) mostly Electronic copy available at: https://ssrn.com/abstract=3923184 analyzed consumer’s choice between food and clothing Similarly, when building the basic theory of consumer choice, in Principle of Microeconomics, Mankiw (2016) mostly analyzed consumer’s choice between Pepsi and pizza, but actually, Pepsi and pizza are mostly used to satisfy people’s different needs Pepsi is mostly used as drink, bringing water to human body, while Pizza is mostly used as food, bringing nutrition or calorie to human body And, after analysis mostly on consumer’s choice between commodities that satisfy different needs, economists as mentioned above got the consumer choice theory, preference and utility theory, and use it to explain consumer’s all choices The reason that economists always focused on consumer’s choice between commodities that satisfy different needs, and use the theory found to explain consumer’s all choices, is because economists always believe that, in above two different types of consumer choice, consumer choice logics are the same But, as analyzed in this paper, the two different types of consumer choice are quite different in consumer choice logic In traditional economics’ preference and utility theory, consumer’s choice in fact is a one step one approach choice One step is that consumer directly chooses a bundle of commodities from the market One approach is that consumer makes the choice only by utility (or preference) In history, many researchers of economics gave important contributions to consumer choice theory, such as Menger (1871), Jevons (1871), Walras (1899), Edgeworth (1881), Marshall (1890,1938), Pareto (1906), Samuelson (1938), Hicks (1939), Debreu (1959), Lancaster (1966), but they always focused on consumer’s choice between commodities that satisfy different needs, though they might not intend to Such as, Menger (1871) focused on consumer’s choice between commodities that satisfy different needs, such as consumer’s choice between food and tobacco Marshall (1938) only analyzed consumer’s choice between commodities that satisfy different needs, such as consumer’s choice between sock and vest Such as, the revealed preference theory created by Samuelson (1938) is better to be seen as a theory to explain consumer’s choice between commodities that satisfy 10 Electronic copy available at: https://ssrn.com/abstract=3923184 A Deeper Research on Real World’s Consumer Choice Here, we provide a deeper research on real world’s consumer choice We will analyze how consumer makes choice when commodity is heterogeneous in attribute We will show that, why there are two different types of consumer choice and why consumer will make choice in two steps two approaches’ way 4.1 Consumer’s Need and Commodity’s Attribute Lancaster (1966), Rosen (1974), etc., argued that, commodity owns certain objective attribute or characteristic, and the utility of commodity comes from the objective attribute or characteristic of commodity Lancaster and Rosen are right In real world’s market, consumer’s utility (satisfaction) from commodity does come from attributes of commodity Such as, consumer’s satisfaction from bread does come from the nutrition of bread But real world’s market goes a little farer than Lancaster (1966) and Rosen (1974), since in real world’s market, consumer’s need is closely related with commodity’s objective attribute (In this paper, attribute is the same as characteristic) We can find, in real world’s market, the satisfaction of consumer’s certain need by commodity, is a use of commodity’s specific attribute Such as, the satisfaction of consumer’s need of getting nutrition, is a use of bread’s attribute that bread contains nutrition The satisfaction of consumer’s need of keeping body warm, is a use of clothing’s attribute that clothing can keep body warm In fact, this idea is widely accepted in many other disciplines Such as, most pharmaceutical scientists believe that, the satisfaction of consumer’s need by drug, is a use of drug’s attribute that drug contains certain active ingredient But in economics, this idea wasn’t paid enough attention to and was often ignored Economists tend to argue that consumer’s consumption of commodity is a process of getting satisfaction (utility), actually ignored the important fact that the satisfaction of consumer’s certain need is a use of commodity’s specific attribute, such as Marshall (1890), Hicks (1939), Samuelson and Nordhaus (2005, 2010), Mankiw (2016) And, in real world’s market, consumer’s different need is often satisfied by 14 Electronic copy available at: https://ssrn.com/abstract=3923184 different attribute Such as, the need of getting nutrition is satisfied by bread’s attribute, nutrition contained, but, the need of keeping body warm is satisfied by clothing’s attribute, warmth keep ratio There does exist the situation that one attribute of commodity can satisfy consumer’s several needs, such as, alcohol is used to satisfy two needs of consumer, the need to drink alcohol and the need to kill germs But, this situation is not the majority of real world’s market And, in real world’s market, the same need of consumer is often satisfied by the same attribute Why bread, noodle, rice, etc are all used to satisfy consumer’s need of getting nutrition？Because they have the same attribute, nutrition contained, then are used to satisfy consumer’s the same need, the need of getting nutrition And, in real world’s market, commodities satisfying the same need will have the same attribute Such as, different brands of bread are used to satisfy consumer’s the same need, the need of getting nutrition, and, different brands of bread have the same attribute, nutrition contained (Though the amount of nutrition might be different) And, in real world’s market, commodities satisfying different needs will have different attributes Such as, bread and clothing are used to satisfy consumer’s different needs, and, bread and clothing have quite different attribute, bread has the attribute of nutrition contained, while clothing has the attribute of warmth keep ratio As whole, in real world’s market, consumer’s need is closely related with commodity’s attribute Without considering some special situation, consumer’s different needs are satisfied by different attributes of commodity, consumer’s the same need is satisfied by the same attribute of commodity, and, commodities satisfying different needs will have different attributes, commodities satisfying the same need will have the same attribute 4.2 The Two Different Types of Consumer Choice As analyzed above, in the real world’s market, the satisfaction of consumer’s certain need by commodity, is a use of commodity’s specific attribute, and, consumer’s different needs are often satisfied by different attributes of commodity, consumer’s the same need is often satisfied by the same attribute of commodity, and, commodities 15 Electronic copy available at: https://ssrn.com/abstract=3923184 satisfying the same need will have the same attribute, commodities satisfying different need will have different attributes In real world’s market, consumer’s one need might be satisfied by several attributes of commodity Such as, consumer’s need of driving is satisfied by car’s attributes such as speed, acceleration, etc And, in real world’s market, commodity might have several attributes, such as a computer will have attributes such as CPU speed, hard disk capacity, etc To find out the basic law of consumer choice quickly, at the beginning, we will focus on the simplest situation The simplest situation is that, one need can be satisfied by one attribute, and one commodity only has one attribute Later, we can analyze the situation that one need is satisfied by several attributes and one commodity have several attributes In this paper, at the beginning, we assume that, one need of consumer can be satisfied by only one attribute, different need is satisfied by different attribute, and each commodity has only one attribute We assume the attribute of commodity is objective, observable and positive Under these assumptions, there will be a one-one relationship between consumer’s need and commodity’s attribute, for one certain need of consumer, there is one certain attribute of commodity to satisfy it And, under these assumptions, the relationship between two commodities will be quite simple, either the two commodities own the same attribute and satisfy the same need, or the two commodities own different attributes and satisfy different needs Then, consumer’s choices between two commodities can be classified into two different types The first type of consumer choice, is consumer’s choice between commodities that own the same attribute and satisfy the same need We call this type of consumer choice as consumer’s choice between commodities that satisfy the same need Such as, consumer’s choice between different bread can be seen as consumer’s choice between commodities that satisfy the same need Different bread own the same attribute, nutrition contained in bread, and satisfy consumer’s the same need, the need of getting nutrition The second type of consumer choice, is consumer’s choice between commodities 16 Electronic copy available at: https://ssrn.com/abstract=3923184 that own different attributes and satisfy different needs We call this type of consumer choice as consumer’s choice between commodities that satisfy different needs Such as, consumer’s choice between bread and clothing can be seen as consumer’s choice between commodities that satisfy different needs Bread and clothing own different attributes and satisfy consumer’s different needs Bread owns the attribute of nutrition and satisfy consumer’s need of getting nutrition, while clothing owns the attribute of warmth keep ratio and satisfy consumer’s need of keeping body warm 4.2.1 Consumer’s Choice between Commodities that Satisfy the Same Need Between commodities that satisfy the same need, since commodities have the same objective attribute, then commodities are good substitute to each other, then, consumer will often choose one and give up the other Such as, between bread A and B, since bread A and B have the same attribute, nutrition contained, then, consumer will often choose one bread and give up the other Then, an important question arises Between commodities that satisfy the same need, which one will be chosen by consumer? We find, between commodities that satisfy the same need, consumer will make a choice by attribute (when attribute is cardinal) or preferentially by attribute (when attribute is ordinal) Here, commodity’s attribute is cardinal also implies both commodity and commodity’s attribute are dividable and additive Consumer’s Choice when Attribute Is Cardinal When attribute of commodity is cardinal, between commodities that satisfy the same need (between commodities that own the same attribute), the rational consumer will choose the commodity with higher attribute/price Because, under any given expenditure, buying the commodity with higher attribute/price will bring more positive attribute to consumer, then will bring higher utility to consumer Such as, suppose bread is only used to provide nutrition and bread’s nutrition is cardinal, between different bread, consumer will choose the bread that has higher nutrition/price It’s obvious that, choosing the commodity with higher attribute/price is also a choice under the logic of better attribute at lower cost 17 Electronic copy available at: https://ssrn.com/abstract=3923184 Consumer’s Choice when Attribute Is Ordinal When attribute of commodity is ordinal, between commodities that satisfy the same need (between commodities that own the same attribute), consumer cannot make a choice simply by attribute/price, since attribute is ordinal then attribute/price is meaningless Here, consumer will make a choice preferentially by attribute In this paper, making choice preferentially by attribute means that, if consumer can make the choice by attribute or by utility, consumer will choose to make the choice by attribute, only consumer cannot make the choice by attribute, consumer will make the choice by utility, since making choice directly by attribute is often much easier We take consumer’s choice between clothing A and clothing B as the example, to show how consumer make a choice preferentially by attribute, when attribute of commodity is ordinal Suppose in the market, there are clothing A and clothing B Suppose clothing A and clothing B have the same price p , but have different warmth keep ratio, clothing A’s warmth keep ratio is wA , clothing B’s warmth keep ratio is wB Y is consumer’s income Here, consumer can make the choice between clothing A and clothing B by the following two approaches The first approach is by attribute Consumer can compare the warmth keep ratio of clothing A and clothing B, and choose the clothing that has higher warmth keep ratio, if wA  wB , choose clothing A, and, if wA  wB , choose clothing B Making choice in this way is quite easy, since consumer can easily find out which clothing has higher warmth keep ratio w (Suppose warmth keep ratio is labeled on clothing and consumer noticed it) In this way of choice, consumer only needs to know the qualitative relationship between clothing’s warmth keep ratio w and clothing’s utility U ( w) , if U ( w) is positively related with w , choose the clothing with hihger w , if U ( w) is negatively related with w , choose the clothing with lower w The second approach is by utility Consumer can first calculate out U ( wA ) and 18 Electronic copy available at: https://ssrn.com/abstract=3923184 U ( wB ) , then compare U ( wA ) with U ( wB ) , if U ( wA )  U ( wB ) , choose clothing A, otherwise, choose clothing B Here, making choice in this way is not easy, since it is difficult for real world’s consumer to know precisely how much U ( wA ) and U ( wB ) are In this way of choice, to make a good choice, consumer needs to know the quantitative relationship between clothing’s warmth keep ratio w and clothing’s utility U ( w) It’s obvious that, consumer will prefer to make the choice in the first way, since making choice in the first way is much easier In real world’s market, it’s easy for consumer to know the qualitative relationship between clothing’s attribute and clothing’s utility, such as, it’s easy for consumer to know that, the clothing with higher warmth keep ratio will bring higher utility (or satisfaction) But, it’s often quite difficult for consumer to know the quantitative relationship between clothing’s attribute and clothing’s utility, such as, consumer often doesn’t know precisely how much utility she can get from the clothing with a given warmth keep ratio In real world’s market, it’s easy for consumer to know the qualitatitve relationship between commodity’s attribute and commodity’s utility, but, it’s quite difficult for consumer to know the quantitative relationship between commodity’s attribute and commodity’s utility Such as, nearly all consumer knows that, computer with CPU speed 2000 Mhz can bring higher utility than computer with CPUspeed 1000Mhz But, nearly no consumer knows that how much utility she can get from the computer with CPU speed 2000Mhz and how much utility she can get from the computer with CPU speed 1000Mhz Why consumer makes choice preferentially by attribute, not by attribute? The reason is that, there are some situations that consumer cannot make choice only by attribute, and consumer have to make choice by utility Such as, suppose between clothing A and clothing B, clothing A has higher warmth keep ratio but also has higher price Here, consumer cannot find out which clothing is better only by attribute Here, consumer have to make a choice by utility, and compare U ( wA , Y  p A ) with U ( wB , Y  pB ) , if U ( wA , Y  p A )  U ( wB , Y  pB ) , choose clothing A, otherwise, 19 Electronic copy available at: https://ssrn.com/abstract=3923184 choose clothing B We provide another example to show that consumer will make choice preferentially by attribute Suppose there are clothing A, B and C Clothing A and B have the same price, but clothing A has higher warmth keep ratio Clothing C has the lowest warmth keep ratio and the lowest price Here, consumer will firstly make a choice directly by attribute, and eliminate clothing B from consideration Secondly, between clothing A and clothing C, consumer will compare U ( wA , Y  p A ) with U ( wC , Y  pC ) , if U ( wA , Y  p A )  U ( wC , Y  pC ) , choose clothing A, otherwise, choose clothing C Here, consumer firstly makes the choice by attribute because consumer prefers to make the choice by attribute Here, for consumer, firstly in fact means preferentially Strict proving of this is so easy then we omit it 4.2.2 Consumer’s Choice between Commodities that Satisfy Different Needs Between commodities that satisfy different needs (between commodities that own different attributes), since commodities have different attributes, then, commodities cannot substitute each other (at attribute level), then, consumer will not choose one and give up the other, and consumer will often choose a certain amount of each commodity Such as, between bread and clothing, since bread and clothing are different in attribute, then, bread and clothing cannot substitute each other (at attribute level), then, consumer will often choose a certain amount of each of bread and clothing In fact, without any of bread and clothing, consumer cannot survive, then, between bread and clothing, consumer won’t choose one and give up the other Between commodities that satisfy different needs, since commodities own different attributes, then, consumer cannot make an easy choice directly by attribute, and consumer can only make the choice directly by utility, and consumer will choose the bundle of commodities that has the largest utility under budget constraint Suppose commodity A and B satisfy different needs Here, under budget Y, consumer’s choice is the solution of the following maximization problem 20 Electronic copy available at: https://ssrn.com/abstract=3923184 Maximize U ( xA , xB ) subject to pA xA  pB xB  Y where x A , xB are the quantity of commodity A ,B, and, p A , pB are the price of commodity A, B 4.3 Consumer Will Make Choice in Two Steps Two Approaches’ Way In real world’s market, to satisfy consumer’s the same need, there are often many commodities, and, among these commodities, the magnitude of the same attribute is often different, and, the price also is often different Then, for consumer to satisfy her certain need, she needs to make a choice between commodities that satisfy the same need, and find out the best commodity to satisfy her need Such as, suppose Mike wants to buy a computer to satisfy his need of data processing In the market, there are many brands of computer, Dell computer, Apple computer, ASUS computer, etc., these brands of computer have different CPU speed and also different price Then, Mike needs to make a choice between (or among) different brands of computer, and choose the computer which is the best for him And, in real world’s market, one commodity often has only one or limited attributes, then can only satisfy consumer’s one need or limited several needs, then, for consumer, she needs to buy many commodities to provide many attributes to satisfy her many needs Since consumer’s budget is limited, then, consumer needs to balance the quantity of commodities bought This means, consumer also needs to make a choice between commodities that satisfy different needs Such as, bread has the attribute of nutrition contained, and can satisfy consumer’s need of getting nutrition, but bread cannot satisfy consumer’s need of keeping body warm, which is satisfied by attribute of warmth keep ratio, an attribute owned by clothing Since besides the need of getting nutrition, consumer also have the need of keeping body warm, then, consumer not only need to buy bread, but also need to buy clothing Since the budget is limited, then, consumer needs to make a balance between the quantity of bread and quantity of clothing bought by her, this also means, consumer needs to make a choice between bread and clothing 21 Electronic copy available at: https://ssrn.com/abstract=3923184 The above analysis in fact means, in real world’s market, consumer not only needs to make a choice between commodities that satisfy the same need, but also need to make a choice between commodities that satisfy different needs Then, real world’s consumer choice is often a combination of above two different types of consumer choice There are special situations that consumer only makes choice between commodities that satisfy the same need, or only makes choice between commodities that satisfy different needs.1 But, in real world’s market, these situations are only special situation, mostly, consumer’s choice is often a combination of the two different types of consumer choice Since consumer’s choice is a combination of the two different types of choice, then, how consumer combines the two different types of choice together, is an important theoretical problem to be resolved Traditional economics argues consumer will choose a bundle of commodities that has the largest utility under budget constraint (Samuelson 2005, 2010, Mankiw 2016, etc.) Traditional economics in fact didn’t answer the question that how consumer combines the two different types of consumer choice together Strotz (1957), Gorman (1959), etc developed the theory of separable utility and two stages budgeting of consumer choice, but they still didn’t strictly distinguish the two different types of consumer choice at attribute level, and didn’t disclose how real world’s consumer combines the two different types of consumer choice together As discovered in the two examples in Section of this paper, in real world’s market, consumer will combine the two different types of consumer choice in a two steps two approaches’ way Consumer will first make the choice between commodities that satisfy the same need by attribute, deciding which to buy, then make the choice between commodities that satisfy different needs by utility, deciding how many to buy Why consumer will make choice in the two steps two approaches’ way? The reason is that, making choice in the two steps two approaches way is a more efficient way to Such as, at one noon, Mike is hungry and he decide to buy bread, while in the shop near Mike’s office, there are different brands of bread, then, Mike choose one bread from different brands of bread Here, Mike’s choice is only a choice between commodities that satisfy the same need 22 Electronic copy available at: https://ssrn.com/abstract=3923184 make good choice at less effort Section strictly proved, the two steps two approaches choice is the more efficient way for consumer to make good choice at less effort 4.4 Consumer’s Choice When Commodity Has Several Attributes In real world’s market, commodity might have several attributes Such as, computer has the attributes of CPU speed, hard disk capacity, etc Though in real world’s market, commodity might have several attributes, but one certain commodity is often designed to satisfy consumer’s one certain need, then, different commodity often has different attribute And, though in real world’s market, commodities might share some attributes, such weight, size, etc., but these attributes often have quite different meanings to consumer, then these attributes are better to be seen as different attributes Such as, bread and computer share the same attribute, weight, but, the weight of bread and the weight of computer have different meaning to consumer, weight of bread is positive to consumer, a more weighting bread often means more nutrition, while weight of computer is often negative to consumer, a more weighting computer often makes consumer less satisfied The basic logic of consumer’s choice when commodity has only one attribute can also be used to explain consumer’s choice when commodity has several attributes Such as, computer has several attributes, such as CPU speed and hard disk capacity, etc Suppose computer A and computer B have same price but computer A has higher CPU speed and larger hard disk capacity Here, consumer will choose computer A, by the logic of better attribute at lower cost An alternative way to deal with the situation that commodity has several attributes is that, we can define a new attribute, commodity’s quality, commodity’s quality is a function of commodity’s several attributes, and commodity’s quality might be cardinal or ordinal Then, between commodities that satisfy the same need, consumer can make a choice by quality, and, when qualtiy is cardinal, consumer will choose the commodity with higher quality/price In this way, the above consumer choice laws can also be used to explain consumer’s choice behavior when commodity has several attributes, except that we need use quality instead of attribute 23 Electronic copy available at: https://ssrn.com/abstract=3923184 For the detailed analysis of consumer’s choice when each commodity has several attributes, Lancaster (1966) etc already made some important contributions, then, we won’t address it more Proving the Two Steps Two Approaches Choice In this section, we strictly prove that, making choice in above the two steps two approaches way is rational for consumer to make a good choice at less effort The detailed proving is arranged in Appendix A In the proving, we assume consumer has n different needs, the n different needs are satisfied by n different attributes z1 , , zi , , zn We assume that, there are mi commodities that can provide the i th attribute, and consumer chooses only one from mi commodities to get the i th attribute In the proving, consumer’s utility function is U  U ( z1 , , zi , , zn ) Where U is the utility, zi is the quantity of the i th attribute Assume consumer will choose the bundle of commodities that has the largest utility under budget constraint The bundle of commodities (that has the largest utility under budget Y ) is the solution of the following maximization problem with constraint in commodity space Maximize U ( z1 , , zi , , zn ) n subject to  Px i 1 i i Y with zi  qi xi , i  1, 2, , n Here, one unit of commodity xi owns i th attribute at qi , and zi  qi xi is the total quantity of i th attribute provided by commodity xi Pi is commodity xi ’s price, and Y is consumer’s budget The above maximization problem can be transferred into a maximization problom with constraint in attribute space 24 Electronic copy available at: https://ssrn.com/abstract=3923184 Maximize U ( z1 , , zi , , zn ) n subject to pz i 1 i i Y pi  Vi with zi  qi xi , i  1, 2, , n where pi is the price of i th attribute when consumer buys commodity xi There are mi commodities that can provide the i th attribute, then, there are mi prices of i th attribute, and, the mi prices of the i th attribute are represented by price set Vi We find, to solve above maximization problem, mathematically, the more efficent way is a two steps two approaches way, first finding out the lowest attribute price in price set Vi by attribute, then finding out the best bundle of commodities by utility We argue, the rational consumer will follow the mathematically more efficient way Then, the rational consumer’s choice will be a two steps two approaches choice (for detailed proving, see Appendix A) How to Make Good Choice by this Paper’s Consumer Theory? Suppose in the market, there are 10 brands of bread and 10 brands of computer The 10 brands of bread have different price and contain different amount of nutrition The 10 brands of computer have different price and different CPU speed Then, for consumer to buy bread and computer, how to make a good choice at least effort? Following this paper’s consumer theory, at the first step, the consumer should find out the best computer and the best bread for her Among 10 brands of bread, the consumer can choose the bread that has the highest nutrition/price Among 10 brands of computer, the consumer can first eliminate the computer that has higher price but lower CPU speed, then, among the brands of computer left, the consumer can choose the computer with the best match of CPU speed and price for her At the second step, consumer should make the choice between the bread and the computer chosen at the first step, choosing the best bundle of bread and computer for her, such as 20 pounds of bread and unit of computer 25 Electronic copy available at: https://ssrn.com/abstract=3923184 We can find, by above two steps two approaches’ way, consumer can make good choice at less effort than by other way Here, making good choice means consumer finds out the bundle of commodities with the largest utility under budget constraint Conclusions This paper discovered, in real world’s market, since commodity is often heterogeneous in attribute, then, there are two different types of consumer choice, choice between commodities that satisfy the same need, and, choice between commodities that satisfy different needs The two different types of consumer choice are quite different in consumer choice logic This paper discovered, in real world’s market, since commodity is often heterogeneous in attribute, then, in order to make a good choice at less effort, the rational consumer will make the choice in a two steps two approaches way Consumer will first make the choice between commodities that satisfy the same need, by attribute, deciding which to buy, then make the choice between commodities that satisfy different needs, by utility, deciding how many to buy This paper strictly proved the two steps two approaches choice is rational for consumer, to make a good choice at less effort Reference Alba, Joseph W and Howard Marmorstein (1987) The Effects of Frequency Knowledge on Consumer Decision Making Journal of Consumer Research 14 (June), 14-26 Alfred Marshall ([1890] 1920) Principles of Economics London: Macmillan and Co Ap Dijksterhuis, Maarten W Bos, Loran F Nordgren, Rick B van Baaren (2006), On Making the Right Choice: The Deliberation-Without-Attention Effect, Science, 311, 1005-1007 Aviv Nevo (2011) Empirical Models of Consumer Behavior Annual Review of Economics 3, 51-75 Botond Kszegi and Matějka Filip (2020) Choice Simplification: A Theory of Mental Budgeting and Naive Diversification The Quarterly Journal of Economics, 135 (2), 1153-1207 Carl Menger ((1871), 1976, 2007) Principle of Economics (translated by James Dingwall and Bert F Hoselitz) Alabama, Ludwig von Mises Institute Dawes, Robyn M (1979) The Robust Beauty of Improper Linear Models in Decision Making American Psychologist 34(July), 571-582 Engel J, Kollat D, Blackwell R (1978) Consumer Behavior New York: Dryden Press F Y Edgeworth (1881) Mathematical Psychics: An Essay on the Application of Mathematics to the Moral Sciences London: C Kegan Paul & Co., Paternoster Square Fishbein M, AjzenI (1975) Beliefs, Attitude,Intention and Behavior:An Introduction to Theory and Research MA, Reading, Addison-Wesley Fishburn, Peter C (1974) Lexicographic Orders, Utilities and Decision Rules: A Survey, Management 26 Electronic copy available at: https://ssrn.com/abstract=3923184 Science 20(11) (Theory, July), 1442-1471 George A Akerlof (1970) The Market for "Lemons": Quality Uncertainty and the Market Mechanism The Quarterly Journal of Economics 84(3), 488-500 Gilbert, D.C (1991) “An Examination of the Consumer Behavior Process Related to Tourism” In Progress in Tourism, Recreation and Hospitality Management, edited by C.P Cooper London: Belhaven, pp.78-105 Green, Paul E and V Srinivasan (1978) Conjoint Analysis in Consumer Research: Issues and Outlook Journal of Consumer Research 5(September), 103-123 Henry Long (Lin Hai) (2021) A Two Factors Price Model and Its Use in Real World’s Market, Journal of Political Economy, Forthcoming Herbert A Simon (1955) A Behavioral Model of Rational Choice.The Quarterly Journal of Economics 69(1), 99-118 Jolivet Grégory, Turon Hélène (2019) Consumer Search Costs and Preferences on the Internet, The Review of Economic Studies 86(3),1258-1300 John Richard Hicks (1939) Value and Capital Oxford: Oxford University Press John Von Neumann, Oskar Morgenstern (1944) Theory of Games and Economic Behavior Princeton: Princeton University Press Kahn, Barbara E.; 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