A Direct Utility Model with Dynamic Constraint

Abstract

The goal of the study is to understand how consumers’ constraint as opposed to utility structure gives rise to final decision when consumers purchase more than one variant of product at a time, i.e., horizontal variety seeking or multiple-discreteness. Purchase and consumption decision not only produces utility but also involves some sort of cognitive pressure. Past consumption or last purchase is likely to be linked to this burden we face such as concern for obesity, risk of harm, and guilt for mischief. In this research, the existence and the role of dynamic constraint are investigated through a microeconomic utility model with multiple dynamic constraint. The model is applied to the salty snacks data collected from field study where burden for spiciness serves as a constraint. The results are compared to the conventional multiple discreteness choice models of static constraints, and policy implications on price discounts is explored. The major findings are that first, one would underestimate the level of consumer preference for product offerings when ignoring the carry-over of the concern from the past consumption, and second, the impact of price promotion on demand would be properly evaluated when the model allows for the role of constraint as both multiple and dynamic. The current study is different from the existing studies in two ways. First, it captures the effect of ‘mental constraint’ on demand in formal economic model. Second, unlike the state dependence well documented in the literature, the study proposes the notion of state dependence in different way, via constraint rather than utility.