The Theory of Consumer Choice: A Case of Starbucks
Students will use the theory of consumer choice and the impact of the concepts of asymmetric information, political economy, and behavior economics, to describe how consumers make economic decisions.
Scenario: You have been asked to assist Starbuck’s marketing department to better understand how consumers make economic decisions. Write a 1,050-word analysis including the following:
The impact the theory of consumer choice has on:
Higher interest rates
The role asymmetric information has in many economic transactions.
The Condorcet Paradox and Arrow’s Impossibility Theorem in the political economy.
People are not rational in behavior economics.
Cite a minimum of three peer-reviewed sources not including your textbook. Format your paper consistent with APA guidelines
The Theory of Consumer Choice: A Case of Starbucks
The theory of consumer choice details the different factors that influence consumers’ decision-making. Whether a consumer chooses to purchase a certain product or not depends on multiple influencing factors. Consumers consider various issues before making the choice to consume a specific commodity over another that equally meets the consumer needs. According to Mankiw (2014), consumption depends on various underlying motivations and financial ability. The price of goods and related commodities, consumer wealth and purchasing power, and the ability of the product to meet the consumer needs are among factors that affect consumer decision-making. An analysis of the theory of consumer choice and the impact of the asymmetric information, behavior economics, and political economy will guide Starbucks’ marketing team to understand consumer decision-making and develop better marketing strategies.
The Theory of Consumer Choice (TCC) – Demand Curves and Higher Wages
According to the law of demand, consumption rates increase with a decrease in prices of goods. If the price of commodity increases, the consumption of the product/service decreases following preference for cheaper commodities (Mankiw, 2014). This equates to a shift of the demand curve to the left. Starbucks must consider maintaining sensible pricing to compete effectively. Moreover, lowering the price of a good makes consumers go for it thus increasing its demand. A lower price of products/services causes a shift of the curve to the right, showing a higher demand of the products/services. While Starbucks may consider this approach, developing a pricing technique that considers the costs and ensures effective pricing is critical. A reduction in their pricing is most likely to cause high demand of their product thus a shift of the demand curve to the right (DeSalvo & Huq, 2002). The implementation of the strategy, however, requires effective pricing analysis and implementing a strategy that ensures attraction and retention of customers while maintaining a high profit efficiency (Nicola, 2012).
The demand curve shifts to the right (showing an increase in demand) following an increase in consumer wealth. Growth in consumer wealth causes an increase in purchasing power and, therefore, a high demand for commodities (Nicola, 2012). Consequently, if the consumer wealth is low, the demand curve shifts to the left due to a decrease in purchasing power. The Starbucks’ team must understand the market and set prices depending on the target market. However, understanding the influence of market prices on consumer behavior is paramount. Hands (2010) states that if market prices of commodities, in this case coffee, are lower than a company’s pricing, then the demand curve for the company may shift to the left due to low demand for its products and vice versa. Starbucks must consider its competitors’ prices in the development of prices.
Wage levels play a great role in determining a consumers’ purchasing behavior. High-income earners are more likely to spend more than low-income earners. Starbucks should promote its products and services depending on analysis of the economic areas. A reduction in desire for a preferred commodity affects the higher wages positively less money is used to purchase the commodity (Hands D. W., 2017). An increase in consumer desire for preferred commodity leads to a high budget thus lowering the high wages (Diamond, Vartiainen, & säätiö, 2016). A rise in prices of preferred commodities means consumers will spend more causing a reduction in the higher wages. Likewise, if prices of preferred commodities reduce consumers will spend less having low effects on their wages.
The Relation between the TCC and Higher Interest Rates
According to Mankiw (2014), a high consumption expenditure higher interest rates remain high since consumer expenditure will be more on preferred commodity raising interest rates. If the cost of consumption is low consumer purchasing power is also low meaning higher interest rates will be reduced. A rise in market prices of preferred commodities causes reduced consumer consumption and lowers the interest rates. Lower prices of preferred commodities mean the demand curve is lower and increased purchasing power raising the interest rates. Higher interest rates will decrease if consumer wealth is reduced since this will lower the consumption of preferred commodities. Increasing the prices of alternative products makes buyers opt for other products thus reduction in interest rates. However, if prices of alternative products decrease then interest rates will increase since consumers will go for the alternate commodities (Nicola, 2012).
Asymmetric Information, the Condorcet Paradox and Arrow’s Impossibility Theorem
Consumers’ purchasing power is high in dominant brands; products with well-defined information. The role of asymmetric information increases if a product has low demand due to little information about it. Information asymmetry concerns the difference in access to the relevant information and knowledge for making informed decisions in purchasing a commodity (Mankiw, 2014). Starbucks must focus on investing in efficient marketing to ensure the target market has sufficient enough to choose Starbucks coffee over any other. Imbalance of information between sellers and buyers leads to inefficiency in some markets. The role that asymmetric information has in economic transactions increases if demand for a preferred commodity is high.
Further, understanding the Condorcet Paradox and Arrow’s Impossibility Theorem (AIT) is important for the implementation of efficient marketing strategy (Mankiw, 2014). The Condorcet Paradox argues for the impossibility or failure of the majority rule to create uniform preferences for the greater society (Herings & Houba, 2016). Moreover, the AIT proves the impossibility of a system to satisfy the preferences of the entire social preferences (Mankiw, 2014). Therefore, while Starbucks may generalize customer preferences, understanding that the preferences may not be applicable for the development of universal marketing strategies. Understanding markets and developing marketing strategies aiming specific markets would improve the consumption of Starbucks products/services (Nicola, 2012).
The Irrationality of Consumers in Behavior Economics
to Nicola (2012), behavior economics integrates
psychological insights in the analysis of consumer behavior for the explanation
of consumer decision-making. The Starbucks marketing team must understand the
shortcomings of applying behavior economics in the determination of consumer
preferences and understanding consumer decision-making. However, the team may
spin the irrationality of behavior economics to favor its marketing. People
sometimes consume irrationally following psychological influence (Diamond,
Vartiainen, & säätiö, 2016). For instance,
extensive advertisement of Starbucks coffee on social media platforms and on TV
may influence unplanned consumption. The team should exploit this area of
psychology to influence consumption of Starbucks’ products/services.
DeSalvo, J. S., & Huq, M. (2002). Introducing Nonlinear Pricing into Consumer Choice Theory. Journal Of Economic Education, 33 (2), 166-179.
Diamond, P. A., Vartiainen, H., & säätiö, Y. J. (2016). Behavioral economics and its applications. Princeton, N.J.: Princeton University Press.
Hands, D. (2010). Economics, psychology and the history of consumer choice theory. Cambridge Journal Of Economics, 34(4), 633-648.
Hands, D. W. (2017). The road to rationalisation: A history of “Where the Empirical Lives” (or has lived) in consumer choice theory. European Journal of the History of Economic Thought, 24(3), 555-588.
Herings, P., & Houba, H. (2016). The Condorcet paradox revisited. Social Choice & Welfare, 47 (1), 141-186.
Mankiw, N. G. (2014). Principles of microeconomics. Sydney: South-Western.
Nicola, P. (2012). Efficiency and Equity in Welfare Economics. Berlin: Springer Berlin.