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Economists assume that consumers have a set of preferences that they use to guide them in choosing between goods. These preferences have to satisfy three properties: completeness, transitivity and "more is better".

By completeness I mean that when consumers face a choice between any two bundles of goods, they can always rank them. This rules out the possibility that consumers cannot decide which bundle is preferable. I am wondering how to deal with the introduction new goods? Does it mean that this property only apply to available/existing goods? And should a consumer also rank today a good that is coming tomorrow? I have the intuition that if a new good replaces an existing one, the rank of preferences may change and I dont know how deal with that. Any reference would be appreciated.

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The first key to understanding this is to recognise that consumers have preferences not over goods, but over states of the world. A "state" is a complete description of all factors that are relevant to a decision.

For example,

  • in a simple consumption problem where the consumer must choose between eating a banana and an apple two states of the world would be "I have a banana" and "I have an apple". Here the preferences over states collapse back to simple preferences over goods so we see that simple preferences defined over bundles of goods are really just a special case of the more general idea of preferences over states of the world.
  • Slightly more complicated: suppose you are deciding whether to take an umbrella to work. Now it's not sufficient to simply compare "I have an umbrella" with "I don't have an umbrella" because which of these I prefer will depend upon the weather! So the relevant states are something like "I have an umbrella and rain is forecast", "I don't have an umbrella and rain is forecast", "I have an umbrella and rain is not forecast", and "I don't have an umbrella and rain is not forecast".

Once we think of preferences as being over states rather than goods then it becomes easy to incorporate the kinds of dynamic elements you refer to. For example, if I am choosing between watching a movie in the cinema today versus buying a blu-ray that is released tomorrow then the states could, in principle be quite complicated:

  • "I spend time travelling in the rain to the cinema where I get to see the movie early on a large screen but there may be stupid kids making noise."
  • "I buy the blu-ray, which means I have to wait until tomorrow to see the movie on a small television. But I won't get wet, can watch the movie more than once, and can send my kids away to their grandmothers so they don't make noise."

This example is a bit silly, but should make clear that the idea of a state is very general and allows us to define preferences over all sorts of very exotic decision problems, including those where new goods are arriving or are becoming unavailable. indeed, the choices don't even have to be about goods that I consumer, since states of the world could be things like "I spend an extra hour in bed" vs "I go early to the park with my children".

Completeness requires that the consumer can rank all of the relevant states of the world, where a state is relevant if it could potentially be chosen by the consumer. This is obviously a big ask because there are typically a large number of factors affecting a decision problem, so the number of states a consumer must consider is large.

In practice, consumers use heuristics and approximations to solve their decision problems; they, of course, do not solve the formal, fully-specified optimisation problem. This modelling approach is, nevertheless, useful if it offers a good approximation of consumer behaviour while also making a good trade-off between tractability and empirical relevance. In fact, models of consumer demand and choice based on this simple framework typically do quite well at explaining behaviour, suggesting that this particular modelling simplification is quite useful.

The field of behavioural economics deals with situations in which consumers systematically deviate from this optimal decision process, including cases where they do not consider the full set of states.

Edit: by no means definitive, but this article by Eliaz and Spiegler (2011) is a nice example of modelling consumers who are boundedly rational and do not consider all possible states. The title and abstract are as follows:

Consideration Sets and Competitive Marketing

We study a market model in which competing firms use costly marketing devices to influence the set of alternatives which consumers perceive as relevant. Consumers in our model are boundedly rational in the sense that they have an imperfect perception of what is relevant to their decision problem. They apply well-defined preferences to a “consideration set”, which is a function of the marketing devices employed by the firms. We examine the implications of this behavioural model in the context of a competitive market model, particularly on industry profits, vertical product differentiation, the use of marketing devices, and consumers' conversion rates.

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  • $\begingroup$ Great point: we rank states of the world rather than goods. Thanks. Now, I have a dilemma I don't know which answer I ... prefer! $\endgroup$
    – emeryville
    Dec 1, 2016 at 8:43
  • $\begingroup$ Any reference on the last point about behavioral economics? Thanks in advance. $\endgroup$
    – emeryville
    Dec 1, 2016 at 8:46
  • $\begingroup$ @emeryville Pick this answer :) It is much more detailed, sets a nice standard. $\endgroup$
    – Giskard
    Dec 1, 2016 at 9:13
  • $\begingroup$ @emeryville I added an example from this literature. It's not a literature I know especially well, so if you want a more detailed survey it might be worth asking a new question. $\endgroup$
    – Ubiquitous
    Dec 1, 2016 at 9:28
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Would you like to buy a pack of sugar flavored amazonian soil for 500 dollars?

You can probably answer this question even though you have never heard of this product before. Being able to answer this question, being able to place the newly available consumption alternatives within your ranking is the assumption of completeness.

The same is true if a type of good is replaced. The set of consumption alternatives is changed, but given any two you can still tell which one you prefer.

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  • $\begingroup$ Good answer! Thanks. I had hard time assuming that we can rank "all" the goods: the new, the old and the available ones! I am probably too much worried about the fact that a new one may change our preferences or violate transitivity for instance. $\endgroup$
    – emeryville
    Dec 1, 2016 at 8:38
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You might get some insight from exploring the difference between actual value and perceived value of consumer goods.

There has been interesting research done on the quirks of the human psyche when it comes to comparing something in the present with something in the future, for example this study. People tend to assume something which makes them happy right now would make them less happy if it arrived at some time in the future.

An extrememly tightly controlled experiment on this "present bias", after its validity was questioned, showed that it was a very strong effect if the present choice was, indeed, immediate. The effect reduced if there was any delay, even a small delay in the "right nowness" of the right now product.

This means that people's preferences the day before a new product is released will be radically different from the same people's preferences the day they can actually have it.

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