To illustrate some of the ways in which indifference curve maps might be used to reflect particular kinds of preferences, Figure 2.5 shows four special cases.
A Useless Good
Figure 2.5(a) shows an individual’s indifference curve map for food (on the horizontal axis) and smoke grinders (on the vertical axis). Because smoke grin- ders are completely useless, increasing purchases of them does not increase utility. Only by getting more food does this person enjoy a higher level of utility.
The vertical indifference curveU2, for example, shows that utility will beU2as
F I G U R E 2 . 4
I ndiffere nce Cu r ve Map f or Ham b urger s and So f t D rin k s Hamburgers
per week
6 A
B C
H
D
U1 U2
U3 4
5
3 2
Soft drinks per week
2 3 4 5 6
0
G
The positive quandrant is full of indifference curves, each of which reflects a different level of ultility. Three such curves are illustrated. Combinations of goods onU3are preferred to those onU2, which in turn are preferred to those onU1. This is simply a reflection of the assumption that more of a good is preferred to less, as may be seen by comparing points C,G, andH.
A P P L I C A T I O N 2 . 3 Product Positioning in Marketing
A practical application of utility theory is in the field of marketing. Firms that wish to develop a new product that will appeal to consumers must provide the good with attri- butes that successfully differentiate it from its competitors. A careful positioning of the good that takes account of both consumers’ desires and the costs associated with product attributes can make the difference between a profitable and an unprofitable product introduction.
Graphic Analysis
Consider, for example, the case of breakfast cereals. Sup- pose only two attributes matter to consumers—taste and crunchiness (shown on the axes of Figure 1). Utility increases for movements in the northeast direction on this graph.
Suppose that a new breakfast cereal has two competitors—
Brand X and Brand Y. The marketing expert’s problem is to position the new brand in such a way that it provides more utility to the consumer than does Brand X or Brand Y, while keeping the new cereal’s production costs competitive. If marketing surveys suggest that the typical consumer’s
indifference curve resemblesU1, this can be accomplished by positioning the new brand at, say, pointZ.
Hotels
Hotel chains use essentially the same procedure in compet- ing for business. For example, the Marriott Corporation gathers small focus groups of consumers.1 It then asks them to rank various sets of hotel attributes such as check- in convenience, pools, and room service. Such information allows Marriott to construct (multidimensional) indifference curves for these various attributes. It then places its major competitors on these graphs and explores various ways of correctly positioning its own product.
Options Packages
Similar positioning strategies are followed by makers of complex products, such as automobiles or personal compu- ters, supplied with various factory-installed options. These makers not only must position their basic product among many competitors but also must decide when to incorporate options into their designs and how to price them. For exam- ple, throughout the 1980s, Japanese automakers tended to incorporate such options as air conditioning, power win- dows, and sunroofs into their midrange models, thereby giving them a ‘‘luxury’’ feel relative to their American com- petitors. The approach was so successful that most makers of such autos have adopted it. Similarly, in the personal com- puter market, producers such as Dell or IBM found they could gain market share by including carefully tailored packages of peripherals (larger hard drives, extra memory, and powerful modems) in their packages.
TOTHINKABOUT
1. How is the MRS concept relevant to the positioning analysis illustrated in Figure 1? How could firms take advantage of information about such a trade-off rate?
2. Doesn’t the idea of an automobile ‘‘options package’’
seem inferior to a situation where each consumer chooses exactly what he or she wants? How do you explain the prevalence of preplanned packages?
FIGURE 1Product Positioning
Taste
Z
U1 Y
X
Crunchiness Market research indicates consumers are indifferent between the characteristics of cerealsXandY. Positioning
a new brand atZoffers good market prospects. 1This example is taken from Alex Hiam,The Vest Pocket CEO(Engle- wood Cliffs, NJ: Prentice Hall, 1990): 270–272.
long as this person has 10 units of food no matter how many smoke grinders he or she has.
An Economic Bad
The situation illustrated in Figure 2.5(a) implicitly assumes that useless goods cause no harm—having more useless smoke grinders causes no problem since one can always throw them away. In some cases, however, such free disposal is not possible, and additional units of a good can cause actual harm. For example, Figure 2.5(b) shows an indifference curve map for food and houseflies. Holding food consumption constant at 10, utility declines as the number of houseflies increases. Because additional houseflies reduce utility, an individual might even be
F I G U R E 2 . 5
I l l u s t r a t i o n s o f Sp e ci f i c P r e f e r e n c e s
(a) A useless good Smoke
grinders per week
U1 U2 U3
Food per week
0 10
(b) An economic bad Houseflies
per week
U1 U2 U3
Food per week
0 10
(c) Perfect substitutes Gallons
of Exxon per week
U1 U2 U3
Gallons of Mobil per week 0
(d) Perfect complements Right shoes
per week
U4 U3
U1 U2
Left shoes per week 0
1 2 3 4
1 2 3 4
The four indifference curve maps in this figure geographically analyze different relationships between two goods.
willing to give up some food (and buy flypaper instead, for example) in exchange for fewer houseflies.
Perfect Substitutes
The illustrations of convex indifference curves in Figure 2.2 through Figure 2.4 reflected the assumption that diversity in consumption is desirable. If, however, the two goods we were examining were essentially the same (or at least served identical functions), we could not make this argument. In Figure 2.5(c), for example, we show an individual’s indifference curve map for Exxon and Chevron gasoline.
Because this buyer is unconvinced by television advertisements that stress various miracle ingredients, he or she has adopted the sensible proposition that all gallons of gasoline are pretty much the same. Hence, he or she is always willing to trade one gallon of Exxon for a gallon of Chevron—the MRS along any indifference curve is 1.0. The straight-line indifference curve map in Figure 2.5(c) reflects the perfect substitutability between these two goods.
Perfect Complements
In Figure 2.5(d), on the other hand, we illustrate a situation in which two goods go together. This person (quite naturally) prefers to consume left shoes (on the hor- izontal axis) and right shoes (on the vertical axis) in pairs. If, for example, he or she currently has three pairs of shoes, additional right shoes provide no more utility (compare this to the situation in panel a). Similarly, additional left shoes alone provide no additional utility. An extra pair of shoes, on the other hand, does increase utility (fromU3 to U4) because this person likes to consume these two goods together. Any situation in which two goods have such a strong complemen- tary relationship to one another would be described by a similar map of L-shaped indifference curves.
Of course, these simple examples only hint at the variety in types of preferences that we can show with indifference curve maps. Later in this chapter, we encounter other, more realistic, examples that help to explain observed economic behavior.
Because indifference curve maps reflect people’s basic preferences about the goods they might select, such maps provide an important first building block for studying demand.