New approach to consumer theory

-Kelvin Lancaster

Journal of Political Economy(1966)

Old approach states that goods are the direct objects of utility and that goods are consumed only because of the that they are goods. It means that goods are consumed not because they have intrinsic value but because they are goods.

New approach deviates from the traditional approach and states that it is the properties and characteristics of the goods from which utility is derived.

It assumes that consumption, singly or in combination, are inputs and the output that we get is a combination of characteristics. A product does not have only one characteristic but may have numerous characteristics which many other products may share. A product does not have to be a close substitute to share the same properties but may vary to the extent of a diamond to bread.

The essence of the new approach can be summarized in the following three points:

1. The goods, per se, do not give utility to the consumer. It possesses characteristics which gives rise to utility.

2. In general, a good may possess more than one characteristic, and many characteristics will be shared my more than one good.

3. Goods in combination may possess characteristics different from those pertaining to the goods separately.

Inferences

i. Let us take an example where a person is thirsty and wants to have either Coca Cola or Fanta. The old approach says that he can consume either of the two, to quench his thirst. It doesn’t differentiate between the two and says that both are substitutes goods.

But if a person prefers Coca Cola over Fanta it is because of its intrinsic properties on which basis a consumer differentiates between the two (pt. 1 above).

ii. Both Fanta and Coca Cola share some common characteristics and also they share some common characteristics with mineral water and a fruit juice like fruity (pt. 2 above).

iii. The experience of a consumer might be higher while having coffee at Barista in their friends company, as well as enjoying the ambience of the place, than consuming or experiencing such things separately. He/she may have the same coffee at home and may enjoy such an ambience elsewhere as well but that might not give that same kind of utility to the consumer. In the same way for alcohol consumers the ambience

of a lounge makes all the difference between consuming it there or at their respective homes.

At the same time there might be instances when the joint consumption of two goods may lead to decrease in utility. For example watching T.V. and listening to music on the radio at the same time.

iv. Though the whole paper stresses on consumption of two goods collectively, it implies and applies the same for the consumption of a good with service together, and also for two services together.