Consumer Problem Research Articles

Stochastic optimal control problem of consumption and pension insurance with uncertain lifetime and its application to real-life data

We consider a continuous-time model of optimal consumption and pension insurance for a consumer with an uncertain lifetime. In the model, the consumer earns a stochastic wage income during her working life and optimally allocates her income between personal consumption, pension insurance, and securities with a deterministic dynamic return. Due to the weak development of the stock market in developing countries, employees' income comes mainly from wages and interest on savings from banks, that are discussed in this paper. The consumer's utility and bequest functions are constant absolute risk aversion (CARA). By characterizing the optimality condition of the consumer's problem using the Hamilton-Jacobi-Bellman equation, we find the optimal consumption and pension insurance as a function of wealth in closed form. We consider an application of the model while estimating its key elements using real-life data on age-specific population size, labor income, and interest rates. We show that as the absolute risk aversion for consumption increases, consumption and wealth move in the opposite direction. We also present a novel finding that wealth and consumption can be negatively related across consumers with different levels of consumption risk aversion.

EFFICIENT LIABILITY IN EXPERT MARKETS

AbstractWhen providing professional services, an expert may misbehave by either prescribing “wrong” treatment for consumer's problem or failing to exert proper effort to diagnose it. We show that under a range of liabilities the expert will recommend the appropriate treatment based on his private information if markups for alternative treatments are close enough; however, a well‐designed liability rule is essential for also motivating efficient diagnosis effort. We further demonstrate that unfettered price competition between experts may undermine the efficient role of liability, whereas either a minimum‐price constraint or an obligation‐to‐serve requirement can restore it.

Who's got my back? Comparing consumers' reactions to peer‐provided and firm‐provided customer support

AbstractThis study demonstrates that when an individual encounters a product‐related problem, fellow consumers (i.e., one's peers) have a unique advantage in providing social support to the affected consumer. Specifically, we find that social support can be a dominant driver of consumer satisfaction when the risk of customer defection is at its highest (i.e., following an unsuccessful attempt to solve the consumer's problem). Using real‐world data from an online support community, a pilot study finds that if the problem that a consumer faces goes unsolved, satisfaction is greater when consumers receive peer‐provided versus firm‐provided support. Study 1 replicates this finding in a controlled experiment that realistically simulates an actual customer support incident in real‐time. Study 2 identifies social support as the mechanism that underlies this effect and investigates whether firm employees can take steps to appear more customer‐like and thereby replicate the advantage of peer‐provided support. Finally, Study 3 reveals an alternative strategy (i.e., utilizing multiple employees) that firms can use to enhance social support and provides evidence that peer‐provided support not only enhances satisfaction but also positively influences consumers' behavioral intentions.

China's medical savings accounts: an analysis of the price elasticity of demand for health care.

Although medical savings accounts (MSAs) have drawn intensive attention across the world for their potential in cost control, there is limited evidence of their impact on the demand for health care. This paper is intended to fill that gap. First, we built up a dynamic model of a consumer's problem of utility maximization in the presence of a nonlinear price schedule embedded in an MSA. Second, the model was implemented using data from a 2-year MSA pilot program in China. The estimated price elasticity under MSAs was between -0.42 and -0.58, i.e., higher than that reported in the literature. The relatively high price elasticity suggests that MSAs as an insurance feature may help control costs. However, the long-term effect of MSAs on health costs is subject to further analysis.

Identification of Dynamic Models of Rewards Program

'Frequent-buyer' type of rewards program is a commonly used marketing tool for companies to compete for market shares. It also provides an unique environment for studying consumer's forward-looking behavior. In particular, the consumer's problem can be formulated as a stationary infinite horizon discrete choice dynamic programming (DDP) model. We study the identification issue of this dynamic model of rewards program. To illustrate our identification arguments, we use a simple dynamic store choice model where stores offer 'frequent-buyer' type reward programs. We show that the parameters of this model, including the discount factor, are well-identified. We also discuss the connection between our model and the goal-gradient hypothesis proposed in the psychology literature.

Economic of production and marketing of mango in Gadchiroli district of Maharastra

The present study was undertaken to know the cost and returns, producers' share in consumer's rupee and problem in production and processing of mango. The study has been undertaken in Gadchiroli district. Data pertained for the year 2010-11.The standard cost concept was used for working out per hectare cost and returns. Marketing aspect was studied by calculating producers' share in consumer's rupee. Per hectare establishment cost of mango orchard during five year for overall age groups of orchard was Rs.41,796.08. Among the different items of expenditure share of human labour was higher followed by bullock labour. Per hectare establishment cost for bearing life of the orchard i.e. 20 years was Rs.2,089.80. Per hectare cost of cultivation (Cost C) of mango orchard for the sample as a whole was Rs.63,964.85 per hectare. Average per year gross income for the sample as a whole was Rs.1,48,956.00. The output-input ratio was higher in Dhanora tahsil(1:2.57). As regards marketing of mango, there was only one channel of marketing [(channelproducer consumer (NGO)].Thus, producers' share in consumer's rupee was observed 93.59 per cent. Total marketing cost incurred by mango grower in transportation and market fees contributed higher.

The Economics of Information, Deep Capture, and the Obesity Debate

AbstractThe economic theory of regulatory capture predicts that industry groups will attempt to influence their regulators (for example, by lobbying for rules that exclude competition). It has been suggested that the same logic applies to any powerful institution with the ability to affect industry profits. When the aim of industry is to alter the public's perception of its product (for example, by disseminating favorable messages to the news media or via an advertising campaign, or by funding industry‐friendly scientific research), the end result has been dubbed deep capture. We develop a formal model of deep capture, in which consumers have imperfect information about product quality, and a dominant producer is able to increase his profits by altering the parameters of the consumer's search problem. We demonstrate the empirical relevance of the phenomenon with a discussion of the food industry response to the obesity epidemic.

Does Ricardian Equivalence Hold? the Relationship Between Public and Private Saving in Spain

This paper aims to test the validity of the Ricardian proposition for the Spanish economy in two different frameworks: a) in traditional structural consumption equations and, b)in consumption functions stemming from Euler equations derived from a consumer's maximization problem. Our results lean toward rejection of the Ricardian proposition, although some degree of substitution between public and private saving is detected. Moreover, we provide some evidence of consumers becoming increasingly Ricardian with the level of government indebtedness as it may trigger sustainability concerns. In terms of policy implications, these results would suggest that until 2007 fiscal policy in Spain enjoyed some room of manoeuvre to exert its countercyclical role. The sovereign debt crisis has exhausted such margin.

Occasional Search and Shopping Experience

Consumers need to purchase in every period, but are sometimes busy. In less-busy periods they search for low prices and obtain information about the stores' pricings. In busy periods they do not search but buy according to past shopping experience. Thus, each consumer's problem is to choose a search intensity (how frequently he searches) and to allocate his search activities to less-busy periods. I find an equilibrium in which stores randomize prices and at least some consumers search occasionally. The limiting cases are the Bertrand and Diamond equilibria. I show that price dispersion can be explained by the state of nature, and generally we do not obtain the Bertrand or a stable Diamond equilibrium.

On Risk Aversion, Classical Demand Theory, and KM Preferences

Building on Kihlstrom and Mirman (1974)’s formulation of risk aversion in the case of multidimensional utility functions, we study the effect of risk aversion on optimal behavior in a general consumer's maximization problem under uncertainty. We completely characterize the relationship between changes in risk aversion and classical demand theory. We show that the effect of risk aversion on optimal behavior depends on the income and substitution effects. Moreover, the effect of risk aversion is determined not by the riskiness of the risky good, but rather the riskiness of the utility gamble associated with each decision.

CREDENCE GOODS MARKETS WITH CONSCIENTIOUS AND SELFISH EXPERTS*

I study credence goods markets when there are both selfish and conscientious experts. The selfish expert is a profit maximizer. The conscientious expert wants to maximize profit and repair the consumer's problem. There are two classes of equilibria: uniform-price equilibria and nonuniform-price equilibria. A consumer cannot infer the expert's type from his price list in a uniform-price equilibrium but can do that in a nonuniform-price equilibrium. When the fraction of the conscientious expert is small, the selfish expert will be honest about the severity of the consumer's problem. When the fraction of the conscientious expert is large, the selfish expert will cheat the consumer; overcharging the consumer whenever he offers to repair the problem. Finally, more conscientious experts may result in a larger social loss. When the fraction of the conscientious expert is close to one of the two extremes, 0 and 1, more conscientious experts will result in smaller social loss. When the fraction of the conscientious expert is in a middle range, more conscientious experts may result in a larger social loss.

Value creation from a consumer perspective

This paper explores the concept of value, the process of consumer value creation and the role of firms and consumers in the value creating process. These issues, central to marketing researchers as well as marketing practitioners, have been much debated, but little empirical research has been devoted to the area. We use the example of food consumption to analyze the mechanisms for consumer value creation. The case study we use consists of a large Swedish retail firm, a panel of 35 households who are its customers, and four of its main suppliers. A central finding from this case study is that consumer value - i.e. what consumers perceive as good or value-creating for themselves - is less about access to separate products and services that meet articulated wants and needs, and more about how consumers use available goods and other resources to create value in their complex everyday lives - in ways that fulfill their own goals, and make them feel good. Hence, often, the consumer's biggest problem is how to integrate available resources and to make trade-offs between different value dimensions in a way that contributes to a good life. Firms can support these value creating activities by helping consumers use their available resources in an optimal way. These findings contribute to the development of consumer value theory. By offering an improved understanding of consumer value creation this paper helps marketing practitioners contribute more positively to the value creating process. In particular, we use our analysis to suggest five modifications to traditional approaches to marketing management.

Lattice Theory and the Consumer's Problem

This paper explores and explains the application of the lattice theoretic approach to classic comparative statics in consumer theory. Through examples of preferences that are not quasiconcave, or not differentiable, or not continuous, the approach is shown to characterize income effects more powerfully than the standard approach. The underlying partial order is key to applying the method. Therefore, several adapted partial orders are introduced and discussed.

A System for Nutritional Consulting Using Quick Questionnaires on Diet and Unidentified Complaints

The aging of society and ongoing health care cost-control policy set the trend for the self-medication which leads to the growing interest in health promotion and prolongation of healthy life expectancy through self-health management. We developed a self-medication support system to provide comprehensive support to consumers at pharmacies and drug stores. This system facilitates the effective use of information and knowledge based on medicine and health. This self-medication support system comprised a set of two terminals connected network server in the data center: a user terminal for consumers use and an advisor terminals for specialized advisor, pharmacists, registered dieticians, and etc. This system enables specialized sales people to provide the appropriate advice based on the factors of consumer’s problem, and to make suggestions for improving his/her lifestyle: eating habit, doing exercise, and having relaxation time. As a result of the trial use of this system at pharmacy stores, a certain degree of correlation between the results of a questionnaire on unidentified complaints and dietary patterns causing potential micronutrient deficiency was demonstrated.

Running to Keep in the Same Place: Consumer Choice as a Game of Status

If individuals care about their status, defined as their rank in the distribution of consumption of one “positional” good, then the consumer's problem is strategic as her utility depends on the consumption choices of others. In the symmetric Nash equilibrium, each individual spends an inefficiently high amount on the status good. Using techniques from auction theory, we analyze the effects of exogenous changes in the distribution of income. In a richer society, almost all individuals spend more on conspicuous consumption, and individual utility is lower at each income level. In a more equal society, the poor are worse off.

Lattice Programming and the Consumer's Problem

This paper provides an introduction to and discussion of the application of the lattice programming method to classic comparative statics problems in consumer theory. These include comparative statics over densities and consumer types, and characterizations of income effects. The partial order underlying a lattice space is key to determining whether the method applies. Several partial orders are used to derive sufficient conditions for normality. These conditions can encompass, and are otherwise distinct from, the standard ones.

Running to Keep in the Same Place: Consumer Choice as a Game of Status

We investigate consumer choice where individuals care not only about the absolute values of consumption, but also about their status. This is defined as their ordinal rank in the distribution of consumption of one good. In such a situation, the consumer's problem becomes strategic as her utility will depend on the consumption choices of others. In the symmetric Nash equilibrium of the resulting game, each individual spends more on visible consumption than in the absence of a concern for status and has lower utility. Treating status endogenously allows us to analyze how exogenous changes in the distribution of income can affect individual choices. In a more affluent society, individuals spend a higher proportion of their income on the positional good, which leads to a reduction in utility at each income level. In a more equal society those with lower incomes spend more on conspicuous consumption and are worse off. We go on to analyze externality-correcting consumption taxes and subsidies.

A solution method for consumption decisions in a dynamic stochastic general equilibrium model

Abstract In this paper we describe a numerical solution of the consumer's life-cycle problem based on value function iteration. The advantage of our approach is that it retains the versatility of the value function iteration approach and achieves a high degree of accuracy without resorting to the very computationally burdensome task of calculating a very fine grid. There are two innovations, the first is not to discretise the state space but effectively to allow the states to take any value on the real line by using two different third-order interpolation algorithms: bicubic spline for extrapolation and interpolation on the edge of the grid and the faster cubic convolution interpolation for inside the grid. The second is to compute a pair of nested grids, one coarse and one fine. The fine grid is used to calculate the consumption paths of the majority of individuals, and the coarse grid to catch only the few with very high incomes. We shall discuss our approach in relation to those already in the literature. We shall argue that value function iteration approach is probably the most flexible and robust way to solve these problems. We shall show that our implementation achieves a high degree of accuracy, using a modified den Haan and Marcet simulation accuracy test, without comprising significantly on speed.

Transaction costs and predictability: some utility cost calculations

We examine the loss in utility for a consumer who ignores any or all of the following: (1) the multi-period nature of the consumer's portfolio-choice problem, (2) the empirically documented predictability of asset returns, or (3) transaction costs. Both the costs of behaving myopically and ignoring predictability can be substantial, although allowing for intermediate consumption reduces these costs. Ignoring realistic transaction costs (fixed and proportional) imposes significant utility costs that range from 0.8% up to 16.9% of wealth. For the scenarios that we consider, the presence of transaction costs always increases the utility cost of behaving myopically, but decreases the utility cost of ignoring predictability.

Domestic Price, (Expected) Foreign Price, and Travel Spending by Canadians in the United States

In this paper we develop and test a model to explain travel expenditures in the United States by Canadians. The model examines a consumer's choice problem where in- come is allocated between domestic and foreign consumption. Consumers do not know the foreign price level and base their spending in part on expected foreign price. In addition to expected foreign price, domestic price, exchange rates, income, and foreign price uncertainty influence travel spending. Empirically, each determinant is statistically significant. The con- tribution of each determinant, however, is not the same: Canadian prices and the exchange rate are the primary factors influencing Canadian travel spending. JEL Classification: FiO Prix interieur, prix etranger (anticipe), et de,penses de voyage des Canadiens aux Etats- Unis. Ce memoire d6veloppe et calibre un modele pour expliquer les d6penses de voyage des Canadiens aux Etats-Unis. Le modele examine le probleme du choix du consommateur