There are three fundamental theories of consumer behaviour.
- The Marshallian Approach
Marshal in 1890 gave the cardinal utility theory of consumer behaviour. Marshal followed the approach of Jeremy Bentham that utility is a subjective sensation that is derived from the consumption of the commodity. In addition, Marshal argues that utility can also be measured like other variables. Marshal took money as the unit of measurement of utility that is uniform for all individuals. In this way, one can do all the mathematical operations with the utility and can also compare the utility of different individuals. There are two terms regarding the utility that is must know, first, the total utility i.e., the utility that is gained by consumption of all units of goods or commodities, and the second one is marginal utility i.e., the utility gained by consumption of one additional unit of commodity.
- Law of Diminishing Marginal Utility
The law of diminishing marginal utility is in heart of the Marshallian theory of consumer behaviour. It states that when a sufficient amount of good is consumed, the utility derived from the consumption of every additional unit of that good decreases.
- The Preference Approach (The Indifference Curve Approach)
The preference approach of consumer theory was developed by J.R. Hicks and R.G.D. Allen to overcome the restrictive assumption of the Marshallian approach of consumer behaviour. They refute the two important assumptions of the Marshallian approach i.e., the cardinal measurement of the utility and constant marginal utility of money. According to them, these assumptions reduce the explanatory power of the model.
The basic idea behind the development of preference theory is the ability of the consumer to express his/her preferences about the commodities and set of commodities. Suppose if X1 = X2, it means that the consumer is indifferent between X1 and X2 while X1 ≥ X2 indicates weakly preferred and X1 > X2 indicates the strong preference of X1 over X2. Here the utility is measured ordinally not cardinally.
- Revealed Preference Approach
The preference approach of consumer behaviour is superior to the Marshallian approach as it is based on less restrictive assumptions. However, it is very difficult to observe the preference so the ordinal or indifference curve approach is not operational. This is because market data on goods does not provide sufficient data to construct the indifference curves of the different consumers.
The above deficiency of the Hick-Allen approach leads to the development of the revealed preference approach developed by Paul Samuelson. This approach observes the consumer behaviour directly in the market and then moves from behaviour to preference. According to this theory at a given price and income, a consumer chooses one particular consumption bundle from the feasible consumption set. In other words, consumers prefer a particular bundle over others by rejecting the other bundles in favour of that chosen bundle.
Fundamental Theories of Consumer behaviour: A Critical Appraisal
In the development of the various theories of consumer behaviour, we can observe one thing that all the theorists tried to extract the result from consumer behaviour by minimizing the restrictive assumptions. However, Johnson in 1958 truly argued that all the fundamental theories of consumer behaviour are derived from the proposition that goods are goods. All the fundamental theories believe that goods are demanded because those are goods and completely ignored the intrinsic characteristics of the goods that create the demand for those goods. The current theories did not take into consideration the differences in consumers’ tastes and preferences. In other words, it did not consider the fact that some consumers want more of some goods while some consumers might not like the same goods.
The consumer always reacts towards a good because of the intrinsic characteristics of that good. This is why market researchers and advertisers always take these intrinsic properties into account. There are the intrinsic properties of the two or more goods that create substitution between those goods. The conflict between the intrinsic properties of the goods and the non-consideration of those properties is the search of the term what we call “intrinsic complementarity.”
The fundamental or traditional theories of consumer behaviour do not say anything about the introduction of new products and changes in the quality of the existing product. However the by considering the intrinsic properties of the goods we can easily trace the reaction of the consumers to new products and quality changes. Thus the traditional theories of consumer behaviour are not able to draw a clear relation between the goods and the consumers.