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Is Consumer really the King?

Posted by Alex M Thomas on 21st February 2007

In free market economics, consumers dictate what goods are produced and are generally considered the center of economic activity. [Wikipedia]

Is the price of commodities and services determined by the consumers? Does the consumer have significant control over the prices of good they purchase through their ‘purchasing power’? Or is it just a farce?

Who is a consumer?

Consumer is an individual who has the necessary purchasing power to consume good and services.

On Consumerism

The prices in an economy are said to be dictated by the consumers. The law of demand states that ‘other things remaining the same, as more and more good are demanded, the prices rise and vice versa.’ In accordance to this law, when the consumers demand a great amount of a particular good or service, their prices tend to rise. The reasoning behind it being, when there is more demand, the producers raise the prices in order to acquire a larger profit arising out of the increased demand.

Consumer and ‘Choice’

The consumer is always at an advantage when there is competition because competition means choice. Their votes determine the fate of the manufacturer or service vendor. [Pai 2001]

The theory of consumer choice in Economics states that consumers take into account the following factors before making a purchase. They are

1) How much satisfaction they get from buying and then consuming an extra unit of a good or service

2) The price that they have to pay to make this purchase

3) The satisfaction derived from consuming alternative products

      4) The prices of alternatives goods and services

[Source: Tutor2u]

Rarely do consumers make this kind of analysis. Moreover these days, all sorts of attractive offers are given along with commodities and even services, which attract the consumer towards a particular commodity or service. In the R and D labs of the companies, huge chunks of monies are invested to create a brand image and to promote the product. The scary thing being, the advertisements go to which ever extent possible to attract the consumer.

Rather than the consumer going through the price of alternatives, the company in question provides a comparison table along with the advertisement; making it easier for the consumer. (Hopefully!)

If the consumer had the resources to make the above mentioned comparisons and then make a transaction based on that, probably the consumers would have been the King. Moreover, most of the information is kept as secret by the company. With regard to the existing informational asymmetries in the markets, the Right to Information Act passed by the Government of India is a welcome step.

Asymmetric Information and Consumers

Asymmetric information in markets is aggravated by the advertisements, as they portray the best in their respective products, by employing the best possible personnel. This not only distorts the true image of the product, but also places the consumer in a difficult position. [Thomas 2006]

Conclusions

Thus, in an economy characterized with sharp informational asymmetries, the presence of trans and multi national companies, a booming advertisement market coupled with more than 50 per cent of the Indian populace earning less then $2 a day, the consumers will really find it extremely hard in making informed choices.

References

1) Alex M Thomas, The Economics of Information, Undergraduate Economist, 2006.

2) M.R. Pai, Consumer Activism in India, 2001.

 

UPDATE

This article which was pointed out to me is an article too important to miss.

Montague’s hunch was that the brain was recalling images and ideas from commercials, and the brand was overriding the actual quality of the product.

While neuroscientist Montague’s ‘Pepsi Challenge’ suggests that branding appears to make a difference in consumer preference, BrightHouse’s research promises to show exactly how much emotional impact that branding can have.

Thanks to Riot, who pointed out this interesting yet shocking read.

Posted in Consumer Theory, Consumerism, Economics, India, Information asymmetry | 22 Comments »