This video helps understand how characteristics demand works. We start with a simple example, using just two brands. Then, we’ll see what happens when we allow for convex demand curves. Finally, we’ll see how a new brand might change the analysis.
Characteristics demand theory states that consumers derive utility not from the actual contents of the basket but from the characteristics of the goods in it. This theory was developed by Kelvin Lancaster in 1966 in his paper “A New Approach to Consumer Theory”.
This approach allows us to predict how preferences will change when we change the options or baskets presented to consumers by studying how these vary according to the change in the characteristics that make them up. With conventional theory, the introduction of a new option meant that we could not reliably predict how this would slot into the consumer’s preference map. However, by relying on a study of the characteristics rather than the goods or service involved, we can predict how changes will affect a consumer’s behaviour without needing to start once again empirically.
Characteristic demand theory also helps justify the existence of brands. Luxury brands are able to charge a surprice for their products by differentiating themselves from competitors that sell similar goods.
Learn more by reading the dictionary entry.