Consumer Choice Theory for Understanding Consumption Decision-Making Process Assessment 3 Answer

Assessment 3: Research Project

Research Topic 1.

Ma Nuo, a 22 year old model from Beijing, said:

I’d rather cry in a BMW than laugh on a bicycle.

The truth is that Ma is far from alone in her material requirements for marriage. Millions of Chinese women, and their parents, are like her.

You are hired by a marketing agency to write a report on what motivates people to consume (impulsive and compulsive consumption). You discover that the consumer choice theory has something to say about our consumption behaviors. Discuss the contribution that the consumer choice theory makes to the understanding of our consumption decision-making process.

What is consumption?

Consumption in economics can be defined as spending to acquire some utility. Consumption is different from investing in the sense that investing is the spending which is done to secure future earnings. Consumption is said to be the “Engine for the Economy” because in US it about 70% of the GDP that goes into consumption (Papola J., 2013). 

The consumption theory is based upon the Keynesian theory of real income. The theory gave by Economist J.M. Keynes says that the consumption is dependent upon the income earned by the consumer. In short run the consumption is determined by the real income of the consumer. The consumption is affected by inflation and that is the reason Keynesian theory considers the real income. Thus if the increase in income is equal to the inflation, the real income is same, the consumer cannot consume or buy goods more than earlier because the real income has not increased. Thus the real income or Keynesian Theory forms the basis of consumption theory (Hill, A., 2020).

There is also the theory of constraints of budget which says that consumption is directly affected by capital possessed by the people. 

What motivates people to Consume?

Consumption pattern of people is affected by various factors. Some of the major factors in addition to the real income are:

1. Prices: The increase in prices of the good not due to inflation but due to new technology, scarcity of resources or other factors leads to lower consumption by the people. The higher consumption will mean lower savings and using more percentage of income in spending. This might not be acceptable to all.
2. Taxes: Taxes here means the indirect taxes imposed on goods and services as well as direct taxes. The direct taxes are straight away deducted from the income of people to derive the disposable income. The governments are inclined to raise the direct taxes rates to increase revenue for development of the country. The indirect taxes are on purchase of goods and services. The indirect taxes also play the role to restrict the rampart use of resources by people. 
3. Savings: Higher consumption means lower savings. It is observed that people at different stages in their life have different preferences on savings versus consuming. As people age they are inclined more towards savings than consuming. 

In addition to above the modern economy also leads to bifurcation of consumption of the people as impulsive or compulsive. The consumer behavior plays a very powerful role in consumption and framing the society needs. These approaches to study the consumption behavior observes the consumption driven by the materialism and status (Tokgoz, E., 2020). Materialism is the personality trait where the material possessions and comforts are valued more. The status consumption is done so to buy the products which are believed to reflect a level of status in the society about the purchaser/user in the eyes of peers. 

Impulsive Buying

Impulsive buying can be defined as the sudden urge to purchase the product immediately. The urge is driven more by the desire for a particular brand or product and outweighs the willpower to purchase the product.  Impulsive buying is observed to be related with the character of an individual that make the more likely to indulge in impulsive buying (Faber, J.R., 2010). The researches shows that the materialist desires leads to impulsive purchasing in young people. The materialistic approach is affected by certain external factors like the lower self-esteem, influence of friends and peers, economic class of the individual, age and gender. It is considered as the negative characteristic trait and reflects lower level of happiness in life of the purchaser. The impulsive buying leads to quick decision to buy a product and desire for immediate possession. It results in unplanned buying.  

Compulsive Buying

Compulsive buying on the other hand is the result of the uncontrollable urge to purchase the product and can be termed as psychological disorder. The urge created under this situation is created by negative feelings or events. If the urge is controlled can result into tension and can be dissipated only when the purchase is made.  The buying is not based upon the needs and the purchaser might end up not even using the product purchased. Compulsive buying is done in order to get temporary relief from the negative thoughts and feelings and not exactly from the desire to purchase the product (Faber, J.R., 2010). The need and desire to maintain the special status is observed to lead to compulsive buying in the young generation (Tokgoz, E., 2020). The consumptions is an evidence of wealth which is done most of the times to show off the wealth to get either respect and important in the society and make other feel envy. 

Consumption Choice Theory

Consumption choice theory tries to explain the buying behavior or pattern of the consumers. The theory states that the buyers consume the things in order to get the maximum satisfaction. The consumer spend money only when the satisfaction from consuming the money than the satisfaction derived from keeping the money. This also known as substitution effect. One product can substitute other only when the utility/satisfaction from the substitute is more than the substituted product. The first requirement of an individual is food. Once that is fulfilled, the money sending id stopped and it is diverted to other things like clothes, house, vehicles etc. because the substituting food with other products gives higher satisfaction. The substitution effect can be further to understand the consumer choice on change in income, budget price of goods and availability of substitutes. 

The theory is based upon three assumptions (Salvatore, 2008):

1. While making the purchase the consumer buys the things first which makes him happiest. This is known as maximization of utility in economics.  The decision is well calculated depending upon the personal choices and preferences.
2. There is always the principle of non-satisfaction. The consumer is never satisfied completely and would ways want to consume some more. This is a psychological constraint of the theory. Shopping is never enough!
3. There lies the concept of decreasing marginal utility.  As the consumer consumes more, the happiness increases but the increase is at a declining rate. Thus the pleasure derived as each unit of good is consumed more decreases with increase in consumption.

The consumer choice theory explains the reasons for consumption and the patterns for consumption. The theory doesn’t imply that the same product is to be consumed to get happiness or satisfaction. The consumer choice for different products can be further explained by the indifference curves. The indifference curves reflects the value of each good as perceived in relation to other good by the consumer. Thus the consumer is ready to switch the consumption from good X to good Y if the good Y has higher utility to the consumer.  However the utility per unit of one good may not be equal to the utility per unit for another good. The indifference curves demonstrates the quality of good X which gives the equal utility to the given quantity of good Y. Every point on the indifference curve gives same level of satisfaction to the consumer and so the consumer is indifferent to the choice of one of the goods or a combination of goods lying in the curve. This theory explains the choice made by consumer from among the different goods available (LumenLearning.com).

The indifference curve can be understood with the simple comparison of consumer choice between food and clothes.

Given two good Foods and Clothes. Initially the consumer has higher utility for food. Thus to give up the consumption of a unit of food the no of clothes units are very high.  As the consumer consumes more food the utility per unit of food decreases and the consumer is ready to exchange a unit of food for less units of clothes. 

The different consumers with different budget will have different indifference curves. 

Impact of Consumption choice theory on Consumption Decisions

The consumption Choice theory is observed to have a strong explanation to the consumption decisions.  The consumer choices and preferences varies for individual to individual and no indifference curve can be suitable for all. 

The latest researches shows that psychology plays a very important role in consumer choice theory. The psychology was observed in the history of Consumer choice theory at the time of neoclassical revolution around 1870. Later in the last decade of 19^th century the consumer choices were taken by the theories ordinal and preferences. These theories suggested that though the consumers made choices based upon the utility maximization, the function was governed by better or worse. It did not consider the cardinal valuation of various commodities. However, the new generation shows the signs of phycology back in the consumer choice giving importance to neuroeconomics (Hands, D.W., 2009).   

The neo classical theory strongly suggests the consumer choice changes with prices of the goods and income. The choice is guided by the personal preferences of the consumers, their budget constraints and individual utility maximization.  The research conducted by Adena & Huck (2017), revealed that the consumer preferences to spend are dependent upon the four factors:

• The relative changes in the prices of the goods. As the goods become expensive their consumption decreases. This is known as the pricing effect. Price of the product is central to purchase. Though not all products are price elastic and it depends upon the nature of the product if their consumption increase with decrease with price or vice-versa or it is unaffected by the change in price. 
• The income of the individuals.  This is also known as income effect. This is highly related with the pricing of the products. As the income increases the consumption/spending also increase as it increases the relative buying power of the consumer.  However if the price of goods also increases the change in the consumption level depends upon the proportional increase in income.
• The expenditure budget of the communes as compared to their savings budget. As the preferences for savings increases, the consumption decrease and vice versa.
• The substitution effect - This is closely related to the income effect. The decrease in income will result in purchase of more affordable goods while the higher purchasing power leads to substituting the cheaper goods with more expensive products. 

The research concluded that given the above three factors the consumers spend on the goods that gives them higher utility or satisfaction.  The consumer behavior is consistent with the consumer choice/preference theory.

There are some exceptions to the consumption theory where the theory is violated out.

Exceptions to Consumer Choice Theory

The consumer choice theory is the based upon the study of normal human behavior and supported by market research. However there are certain situations where the Consumer choice theory does not apply and the consumer behavior does not confirms it. But in these cases the deflection from the consumer theory is well understood and reasoned. 

Giffen Goods and Neutral Goods

The biggest deflection from the consumer choice theory are the Giffen goods and Neutral goods. The consumer choice theory says that as the price of the goods increases their demand decreases because the utility derived from the goods reduces as compared to the money spent on it. However this does not apply on the above two types of goods.

Giffen goods are the expensive and high- end luxury goods like the expensive fashion products, artifacts, luxury cars, etc. The demand of the goods increases as their price increases and do not follow the concept of substitution effect. The consumption of these products is driven by the status, and display of wealth to the society. Compulsive buying is supported by the consumption pattern of Giffen Goods (Taylor, T., 2012).  The consumers buying the expensive clothes or arts/antique pieces tend to buy them more if the price increases as the symbol of their status. 

Neutral goods are the items of necessity and show deviation from the substitution. The products are consumed in fixed quantities and the consumer will be ready to pay higher price for them even if the price increases.  For example the consumption of wheat or rice.  A family consumes almost affixed quantity of food. Even if the price increases, the consumption will remain the same and the consumer will be ready to spend more on it.  The need of air conditioners increases in summer season, even though the prices increased the demand of the product does not decline because it becomes the necessity in the summers (CFI, 2020). 

What Deviates from Consumer Choice Theory!

There is observed more often that the consumers deviate from the consumer choice of theory of maximum utility or higher satisfaction. The consumer behavior is observed to be subject to bias which leads to poor purchasing decisions. This element of bias is exploited by marketing experts to influence the purchasing decisions of the consumers. The consumers are sometimes subject to overload of information that leads to bad purchase decision (Grether, D.M. & Wilde, L.l., 1983).  The society tends, peer pressure and even electoral commission and government warnings are observed to change the consumer purchase decisions. These are the deviation from the consumer choice theory.

Choice as Electoral Behavior

If one goes by the theory of consumer choice, the voter should make the rational choice by making an electoral decision that would result in his best interest. However the researches and studies in political science shows ignorance of rational consumer choice. It was further explained that the amount and quality of information provided by the governments affected the decision making.  This is also reasoned by reluctance of the political parties to argue the real issues at the time of electoral campaigns. The same is used by marketing companies to influence the behavior of consumers on products (Dean, D., & Croft, R., 2009).   

Neuropsychology of Consumer Behavior

The neuroscience has proved to be of great help to the market researchers in understanding and influencing the consumers’ mind. The measure include use of electroencephalography (ECG) and fMRI (functional magnetic resonance imaging). These studies observes the emotions and cognitive responses of the consumers.  The studies help the marketers to understand what and how can certain things influence the mind of the consumers and their choices.  Some of the ways to grab attention of the consumers are displaying information. The bottom-up attention is automatic while the top-down attention is conscious (Shaw, S. & Bagozzi, R., 2017).  Thus the neuroscience helps in understanding the consumer in a nontraditional way.

Since we have studied that the memory, experiences and information to mind affects the consumer choice and deviates from rationality, the election candidates as well as marketing companies make use of over load of information so as to divert the attention of the consumers from more specific and related information.  Also the use of signs, symbols and heuristic devices tends to grab attention of the consumers and affect their decision-making (Dean, D., & Croft, R., 2009). 

Neuroscience and Consumer Choice Theory

The researchers have been trying to identify the source of consumer choice and tried to correlate the market demand with the neural understanding of the consumers. The research tries to find out firstly, the formation of preferences in the brain of consumers and secondly, if the social, cultural and developmental factors affects the preferences and choices (Hsu, M. & Yoon, C., 2015).

The preferences for certain brands, products are stored in the brain as part of inheritance and certain part of brain, known as ventromedial prefrontal cortex. Any injury or damage to this part of brain affects the preferences of the consumer towards brands.   The preferences are also governed by the developmental phase of the children also. The children who are exposed to brands and products since young age are able to recognize them early and also tend to form biased preferences towards them.  The memory of the consumer of brands and products affects their choices. This can be supported with the observation that household consumers continue to use certain brand products as the part of family tradition culture than its utility over other similar products and brands. Similarly the social experiences and encounters of the consumers in their life affect their choices. The simple example of this the choice of music. It is observed that the choice of music of the individual significantly depends upon the songs that were popular in the adolescence and early adulthood of the individual. At that time the brains capacity to store the facts and memorize them is greatest. 

This study is exploited in many marketing strategies. The consumers are exposed to excess of publicity about a product or brand with limited information on all the possible platforms being the TV commercials, radio, newspapers and social media. The consumers brain make them part of their long term memory. This choices are then biased towards those brands. At times too much of information is given to the consumers’ brain so that the information makes them take biased and wrong decisions (Hsu, M. & Yoon, C., 2015). 

Conclusion

The analysis of consumer choice theory shows that the consumer makes a rational choice that is driven by maximization of utility. As the consumption increases the marginal utility decreases and therefore the consumer is never completely satisfied. The pricing of the goods, in income of the consumer and budget has a role to play in consumption.

However, the real world is filled with examples of consumption that deviates from the consumption theory. The psychology is observed to play a great role in consumption.  It is also observed there are impulsive and compulsive buying which shows the nature, habit and social effect on the consumer. The consumption in these case is driven by short term pleasure, need for society status and display of wealth.  The phycology and neuroscience also shows how the change in the way information is presented to the consumers can help in affecting their decision and deviates from the traditional theory of consumer choice.

In modern world the marketing researchers, political parties are all using phycology as the means to affect the choice of consumers. The role of consumer choice theory is present only in the neutral environment but in the place of manipulations and misrepresentations, the consumer choice theory is least effective in identifying the consumers’ choices and understand their decision making.  On the similar note, the opening statement of the research topic- “I’d rather cry in a BMW than laugh on a bicycle.” Is driven by the physiological factors and cannot be justified using the consumer choice theory. 

Therefore it can be concludes that the neoclassical theory of psychology has a higher role to play in consumer choice than the traditional theory of consumer choice. This opens way to another research to understand if the shift from the consumer choice theory to phycology is the reason for increasing dissatisfaction among the consumers in the world and leading to more cases of depression!