Price as an Indicator of Quality: Report on an Enquiry

Abstract

Models of Bounded Rationality are often seen as more realistic than the traditional alternatives based on the fully-rational homo economicus, assumed by Expected Utility Theory (EUT). In his seminal paper on Bounded Rationality Simon (1955) pictured a decision maker as having computational capacities and limited information. These changes were well received by many economists who disliked the "hopelessly un-realist" flavor of based-EUT models. To put Simon (1955) in a nutshell, though real agents cannot maximize because his rationality and knowledge is bounded, they can satisfy in the sense of choosing a good (but not necessary optimal) option. This view is attractive because it is in line with commonsense and seems to be descriptively accurate, but unfortunately it lacks empirical content-or, to say the least, it certainly has less empirical content than EUT.

A Utility Model for Product Positioning

“…Then a new m can be determined exactly as m was using (2) and (3) Suppose a new firm with utility function v is trying to enter a volume inelastic market with a maximum profit product (x) ; that is, say, (4) A…”

“…A number of authors (see Rao and Shakun [12] , Gabor and Granger [2] Kamen and Toman [7]) have made considerable use out of the concept that, in certain product classes which offer nearly indistinguishable products, ( Let the set of utility functions of the consumers be 2 (10) u (x/A) = Xx -x , k = 1, . .…”

“…-13-That is, the P are norinal distributions with means fp\ isp-, and i})^respec-tively and unit variances (see Gabor and Granger [2] for empirical justification using x. = log price)…”

“…(1) observation of behavior and measurement; (2) reduction and abstractionreducing the n'ar.iber of product dimensions to a few, "independent" ones and labelling them; (3) compaction, developing brand preference measures; (4) probability of choice, relating preference to purchase behavior, and (5) aggregation, transforming probability of purchase measures to market share measures.…”

Pricing Models in Marketing Research

“…I believe that more economic micro-theory could be better tested by doing real world experiments rather than believing such an approach is impossible". Indeed, their collaboration had been prolific and together they created the method now known as Gabor-Granger (or GG-models) price modeling [2][3][4][5][6][7][8][9][10][11][12][13][14][15]. Most of their work has also been presented in a special issue [16], and incorporated into the monograph [17] where Granger wrote the mathematical appendix.…”