Compare lancasters 'characteristics' approach to consumer demand with Essay

Compare lancasters 'characteristics' approach to consumer demand with the standard neo-classical approach. What is lancaster's c - Essay Example Take any microeconomics book and one would be able to see a lot about consumer demand and supply, pricing strategy, branding and supply chain management in detail. These theories and strategies are (Lee & Keen, 2002, p- 7) mostly framed on various concepts which evolved throughout the time for centuries. The neoclassical economic theories are the most famous among them. They are used extensively in economics till date. Neoclassical theory basically explains the output of employment. According to it, the value of the product is determined by the time spend to create it and the labor cost involved. Consumers buy the product for their pleasure(utility). Every consumer purchases a product to make their life easier or pleasurable in one way or another (Clark, n.d.). The theory emphasizes, the people who work more, earn more and hence purchase more. Every business uses neoclassical theories mentioned in these books for creating value for their products and marketing them to a certain exten t. Over the years, many strategies like the prospect theory started to evolve in the place of the neoclassical theory. Lancaster's model of consumer demand which explores the characteristics of the goods is widely applicable to the modern day businesses where no major physical entity is involved. He argues a person buys the characteristics of the product not the real product. He simply states â€Å"goods are what are thought of as goods†. According to the theory, a consumer actually pays for some characteristic of the product like the nutrient content in the milk which will be useful to them. This paper compares the Lancaster theory with the neoclassical concepts and analyzes how the former one is more suitable to the modern day businesses. Lancaster’s Concept The "New Economic Theory of Consumer Behavior" redefined the way the economists look at business. According to the theory, every product is considered as a set of characteristics that are useful to the customer ( Wierenga). This model is multidimensional and helps in maximizing the profits of modern day businesses like cloud computing and software as a service where only the characteristics of the product are utilized by the customers. The Lancaster model is not as famous as the other economic theories. Only a very few scholars have tried to prove its benefits with empirical data. Ratchford has proved the model is applicable when a customer is given a choice to choose one particular product from various alternatives. Lancaster model opposes the traditional demand theory model emphasized widely by the neoclassical theory. The main advantage of this approach is it gives us a chance to explore the technological attributes of the product in a much better way (Marcin, 1992). According to the neoclassical theory, only goods concerned with the basic needs like food, shelter and entertainment are considered as commodities of high demand. They deal with customer choice with budget constraint as the m ain factor influencing the customer behavior. The customer will choose a product that is useful to them in maximum ways and still stays affordable. The Lancaster model on the other hand insists, the goods themselves are not purchased, but only their characteristics, which are in turn shaped by observing the customer b