I. THE CURRENT STATUS OF CONSUMER THEORY m TIHE theory of consumer behavior in deterministic situations as set out by, say, Debreu (1959, 1960) or Uzawa (1960) is a thing of great aesthetic beauty, a jewel set in a glass case. The product of a long process of refinement from the nineteenth-century utility theorists through Slutsky and Hicks-Allen to the economists of the last twenty-five years,1 it has been shorn of all irrelevant postulates so that it now stands as an example of how to extract the minimum of results from the minimum of assumptions. To the process of slicing away with Occam's razor, the author made a small contribution (I 957). This brought forth a reply by Johnson (1958) which suggested, somewhat tongue-in-cheek, that the determinateness of the sign of the substitution effect (the only substantive result of the theory of consumer behavior) could be derived from the proposition that goods are goods. Johnson's comment, on reflection, would seem to be almost the best summary that can be given of the current * The author wishes to acknowledge helpful comments from various sources, including Gary Becker, Harry Johnson, and colleagues and students
Demand for variety may arise from a taste for diversity in individual consumption and/or from diversity in tastes when each consumer chooses a single variant. The full degree of variety potentially demanded will not, in general, be supplied because scale economies (even to a small degree) mean that the potential welfare or revenue gain from greater variety must be balanced against the lower unit production costs with fewer variants. The economics of product variety consists essentially in analysing the effect of this balance in different situations, and comparing the degree of product variety for different market structures with each other and with the optimum. The survey commences with the work on market structures with single product firms (generalized monopolistic competition), tracing modern developments in both the Chamberlinian and Hotelling traditions. The latter has been particularly fruitful, due to the expansion of the original locational ideas into virtual spaces in product characteristics. The emphasis in recent work on product variety has been on multiproduct firms in both monopolistic and oligopolistic structures, including strategic market preemption. Although most work has been in a full information context, there have been advances in product variety under imperfect information (either by consumers to properties of the firms' products or firms as to consumers' demands).product differentiation, product variety, monopolistic competition, oligopoly
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