IDEAS home Printed from https://ideas.repec.org/a/bpj/bejtec/v9y2009i1n3.html
   My bibliography  Save this article

Why (and When) are Preferences Convex? Threshold Effects and Uncertain Quality

Author

Listed:
  • Smith Trenton G.

    (Washington State University, trent.smith@otago.ac.nz)

  • Tasnádi Attila

    (Corvinus University of Budapest, attila.tasnadi@uni-corvinus.hu)

Abstract

It is often assumed (for analytical convenience, but also in accordance with common intuition) that consumer preferences are convex. In this paper, we consider circumstances under which such preferences are (or are not) optimal. In particular, we investigate a setting in which goods possess some hidden quality with known distribution, and the consumer chooses a bundle of goods that maximizes the probability that he receives some threshold level of this quality. We show that if the threshold is small relative to consumption levels, preferences will tend to be convex; whereas the opposite holds if the threshold is large. Our theory helps explain a broad spectrum of economic behavior (including, in particular, certain common commercial advertising strategies), suggesting that sensitivity to information about thresholds is deeply rooted in human psychology.

Suggested Citation

  • Smith Trenton G. & Tasnádi Attila, 2009. "Why (and When) are Preferences Convex? Threshold Effects and Uncertain Quality," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-24, January.
  • Handle: RePEc:bpj:bejtec:v:9:y:2009:i:1:n:3
    DOI: 10.2202/1935-1704.1518
    as

    Download full text from publisher

    File URL: https://doi.org/10.2202/1935-1704.1518
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.

    File URL: https://libkey.io/10.2202/1935-1704.1518?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kannai, Yakar, 1977. "Concavifiability and constructions of concave utility functions," Journal of Mathematical Economics, Elsevier, vol. 4(1), pages 1-56, March.
    2. Ray G. Huffaker, 1998. "Deterministic Modeling without (Unwarranted) Apology," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 20(2), pages 502-512.
    3. Mark Bagnoli & Ted Bergstrom, 2006. "Log-concave probability and its applications," Studies in Economic Theory, in: Charalambos D. Aliprantis & Rosa L. Matzkin & Daniel L. McFadden & James C. Moore & Nicholas C. Yann (ed.), Rationality and Equilibrium, pages 217-241, Springer.
    4. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    5. Richter, Marcel K. & Wong, K.-C.Kam-Chau, 2004. "Concave utility on finite sets," Journal of Economic Theory, Elsevier, vol. 115(2), pages 341-357, April.
    6. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    7. Rogers, Alan R, 1994. "Evolution of Time Preference by Natural Selection," American Economic Review, American Economic Association, vol. 84(3), pages 460-481, June.
    8. Rubin, Paul H & Paul, Chris W, II, 1979. "An Evolutionary Model of Taste for Risk," Economic Inquiry, Western Economic Association International, vol. 17(4), pages 585-596, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Feng Jie Xie & Jing Shi, 2018. "The Evolution of Price Competition Game on Complex Networks," Complexity, Hindawi, vol. 2018, pages 1-13, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cherchye, Laurens & De Rock, Bram & Vermeulen, Frederic, 2010. "An Afriat Theorem for the collective model of household consumption," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1142-1163, May.
    2. Christopher Connell & Eric Rasmusen, 2012. "Concavifying the Quasiconcave," Working Papers 2012-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    3. Trenton Smith, 2009. "Reconciling psychology with economics: Obesity, behavioral biology, and rational overeating," Journal of Bioeconomics, Springer, vol. 11(3), pages 249-282, December.
    4. Dekel, Eddie & Scotchmer, Suzanne, 1999. "On the Evolution of Attitudes towards Risk in Winner-Take-All Games," Journal of Economic Theory, Elsevier, vol. 87(1), pages 125-143, July.
    5. Trenton G. Smith, 2004. "The McDonald’s Equilibrium. Advertising, empty calories, and the endogenous determination of dietary preferences," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 23(3), pages 383-413, December.
    6. Ok, Efe A. & Sethi, Rajiv & Kockesen, Levent, 1997. "Interdependent Preference Formation," Working Papers 97-18, C.V. Starr Center for Applied Economics, New York University.
    7. ,, 2010. "Rationalizable voting," Theoretical Economics, Econometric Society, vol. 5(1), January.
    8. Coelho, Philip R. P. & McClure, James E., 1998. "Social context and the utility of wealth: Addressing the Markowitz challenge," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 305-314, November.
    9. Andrew F. Daughety & Jennifer F. Reinganum, 2008. "Imperfect competition and quality signalling," RAND Journal of Economics, RAND Corporation, vol. 39(1), pages 163-183, March.
    10. Richard Chisik, 2015. "Job market signalling, stereotype threat and counter‐stereotypical behaviour," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(1), pages 155-188, February.
    11. Yao, Yao (Alex) & Yang, Sha & Sudhir, K., 2024. "Separating substitution and psychological effects of price with a two-step conjoint approach: Application to luxury goods," International Journal of Research in Marketing, Elsevier, vol. 41(2), pages 344-361.
    12. Buchholz, Wolfgang & Schumacher, Jan, 2010. "Discounting and welfare analysis over time: Choosing the [eta]," European Journal of Political Economy, Elsevier, vol. 26(3), pages 372-385, September.
    13. Eric Schmidbauer, 2016. "New and Improved?," Working Papers 2016-02, University of Central Florida, Department of Economics.
    14. Belleflamme, Paul & Peitz, Martin, 2014. "Asymmetric information and overinvestment in quality," European Economic Review, Elsevier, vol. 66(C), pages 127-143.
    15. Simon Loertscher & Leslie M. Marx, 2022. "To sell public or private goods," Review of Economic Design, Springer;Society for Economic Design, vol. 26(3), pages 385-415, September.
    16. Moshe Levy, 2022. "An evolutionary explanation of the Allais paradox," Journal of Evolutionary Economics, Springer, vol. 32(5), pages 1545-1574, November.
    17. Gintis, Herbert, 2004. "Modeling cooperation among self-interested agents: a critique," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 33(6), pages 695-714, December.
    18. Terence C. Burnham & Aimee Dunlap & David W. Stephens, 2015. "Experimental Evolution and Economics," SAGE Open, , vol. 5(4), pages 21582440156, November.
    19. Per Hjertstrand, 2023. "On the Curvature of Homogeneous Functions," Journal of Optimization Theory and Applications, Springer, vol. 198(1), pages 215-223, July.
    20. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:bejtec:v:9:y:2009:i:1:n:3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.