Judging quality by price,snob appeal,and the new consumer theory

Conclusion The analysis contained in this paper has served two purposes. First, it has demonstrated the richness of the new consumer theory by showing how this new approach can incorporate the questions of judging quality by price and price-snob appeal. And second, the paper has derived analytically the conditions under which these phenomena will yield a positively sloping demand curve in a two-commodity, two-attribute world.In traditional theory the consumer's response to a change in the price of a good is conceptually divided into an income effect and a substitution effect. The new approach to consumer theory partitions the consumer's response differently, namely, into an efficiency substitution and a utility substitution. When a general price attribute is introduced each of these divisions retains its individual validity. The conclusion that the efficiency substitution is always non-positive also remains valid. But, the traditional substitution effect may now be positive and of sufficient magnitude to make theentire response to an own-price changepositive,x _i /p _i >0. We have shown analytically, then, as the verbal discussions of traditional consumer theory lead us to believe, that judgment of quality by price and price-snob appeal can result in positively sloped demand curves.The research described in this paper was supported in part by the Econometric Research Program at Princeton University. The authors would like to thank Professors W. J. Baumol, O. Morgenstern, and R. E. Quandt, Messrs. F. D. Gately and R. J. Sweeney, and other members of the Seminar on Research in Progress, Department of Economics, Princeton University, for their helpful comments and suggestions. Of course, any errors that may remain are solely our responsibility.