Application of several econometric techniques to a theory of demand with variable tastes

Abstract

Existing theory of consumer demand does not contain a body of theorems purporting to explain the consumption behavior of individuals when their preferences are changed, either autonomously or by advertising and other forms of selling effort. In view of the importance of advertising in the modern economy, it is desirable that such a body of theorems be worked out. The objective of this study is the formulation of a theory of consumer demand with variable preferences; the governing criterion is that the theory be applicable in econometric demand analysis;The assumption that the individual consumer has only one ordinal utility function is replaced by the assumption that he has a whole family of ordinal utility functions; advertising expenditures by sellers of commodities are assumed to determine which one of these ordinal utility functions is maximized. From these assumptions are derived a number of a priori restraints on measurements defining advertising elasticities of demand. It is shown that advertising elasticities are weighted averages of elasticities of substitution between goods in consumption, the weights being measurements defining advertising elasticities of marginal utilities;Estimates of empirical advertising elasticities of demand for tobacco are presented along with estimates of the elasticity of marginal utility of tobacco with respect to advertising expenditure. The computation of these estimates serves as an example of the application of the theory to problems of econometric demand analysis.