How individuals interact with each other when making their utility judgement?

Yesterday I talked about what differences could be caused when we consider whether or not individuals make their utility judgement independently. Today I want to carry on this topic and make some guesses about how individuals may interact with each other when making their utility judgement and the reasons behind it.

The reasons for people having incentives to interact with each other have several. Firstly, people do not think that they have full access to information in order to make precise estimates about the utilities of products they are going to buy. Therefore, people want to borrow others’ estimates or opinions to try to close the gap between their knowledge and perfect knowledge. Secondly, people are correct that they do not have full access to information. Thirdly, others’ opinions may be another important determinant of utilities, especially the products can be resold to others.

There are many ways for people to have information about others’ estimate of utilities, and here are the most common ones. Firstly, people can directly ask their family members or friends about opinions about their target products. Secondly, people can read suppliers’ introduction about the products, especially the advertises. In this case, people’ utilities are affected by advertising created by suppliers. Thirdly, people can receive signals of others’ opinions about the products by looking at the market prices. Prices can provide implications about products’ utilities, including their popularity, qualities, effectiveness and many other relevant characteristics. Fourthly, people can receive signals of others’ opinions about the products by observing how many people surrounding them are using the products they are interested at. More people are using implies utilities are relatively high.

Overall, people are interacting with each other in the hope of improving their utility judgement.

What is the importance if we do not assume customers estimate the utilities of their potential consumption independently?

Usually we assume that customers have their unique individual estimations about utilities of their potential consumption, the implication of this assumption is that customers will not buy products which have higher prices than their estimated utilities. However, it is extremely difficult to tell customers’ opinions about utilities of particular products, even customers themselves cannot tell clearly what utilities they could gain completely from their consumption. Therefore, it is not reasonable to assume that customers have their independent utility judgement.

If we do not assume that customers judge the utilities they gain from their consumption independently, some common economic theories may violate or potentially violate. The rule of demand tells that when prices increase, the number of customers who are willing to pay tend to decrease. However, if we assume customers do not make their utility judgement independent, when a product’s price increases, the demand for this product could potentially increase as well. This actually happens in our real life, especially in the financial market. When a stock’s price increases, instead of more people selling the stock, it may appear to be more people buying more of the shares. This is a classic example of how people’s utility judgement could affect each other. This may also happen in auctions, a buyer could potentially buy a product with a price that is higher than his or her previous judgement.

In addition, the assumption of customers not making utility judgement independently is the base for marketing strategies. Firstly, customers not making utility judgement independently assures the importance of advertising, as if we assume customers making their utility judgement independently, it implies advertising will not change customers’ judgement about the utilities of their products, thus not change in sales. In addition, For example, making products appear to be cheap is not going to increase sales effectively, as customers are given the impression of cheap products, they could lower their expected utilities of the product, so they are less willing to pay high prices for the product, this could eventually affect the sales.

Overall, once we stop assuming customers making their utility judgement independently, some theorems may potentially violate, marketing strategies can make their theoretical sense (otherwise, marketing would have no impacts on customers’ behaviour).

What is the function of advertisement?

The function of advertisement is simply to help companies to earn more revenues. To earn more revenues has two ways: the first is to attract more people to buy, the other is to convince existing customers to accept higher prices. Previously I argued that customers might not have exact figures about their expected utilities for particular products including both goods and services, so the customers could usually accept a range of prices with different probabilities for different prices. Therefore, under such hypothesis, the function of advertisement is to increase customers‘ probabilities to accept  higher prices.

To convince customers’ probabilities to accept higher prices can both to increase the number of potential customers and to increase existing customers’ acceptances of higher prices. The most important reason for people not buying goods or services is because they do not accept the products’ prices. When advertise is effective to increase people’s probabilities of accepting higher prices, it means two things. For higher prices, people are more likely to accept the higher prices, implying existing customers are likely to be willing to pay higher prices; on the other hand, at a particular price level, more people of the population are likely to accept this particular price, implying more people are likely to buy the products given their prices.

Based on this hypothesis, all advertise should aim to increase people’s acceptance of higher prices, this applies to all kinds of products and services, not only when advertising luxury products. When increasing people’s acceptance of prices, even when the prices do not change, more people are likely to buy the products, as more people become willing to accept the prices.

US trade deficit in its decline

The US international deficit is reported to fall by nearly 1 billion dollars since July, though the exports have been impacted by Hurricanes Harvey and Irma, as the ports were damaged. As the American current account is improved by the increased volume of exports, showing the strength of American products including services still have their comparative advantages and maintain competitive in the world market. In addition, due to the damage dealt by the hurricanes, both exports and imports are very likely to be significantly lower than the normal standards.

In addition, when the US government officially lowers the cooperate taxes, the costs of productions for many American exports would reduce further, this would potentially increase exports and lower imports, as the prices for goods and services produced within the US could be lower as the costs lower. Therefore, from this perspective, the US international deficit will keep dropping especially when the US government officially starts its tax cuts.

However, it does not mean that there is no downside for the US exports. Firstly, once the US tries to improve its products' competitiveness in the global market, other countries will do something similar or even more powerful and radical, this could reduce the comparative advantages of some American products. Secondly, the countries may have significant improvement in their comparatively advantageous sectors or sectors where the US has comparative advantages, for example, according to JD Power, Chinese car-makers close quality gap on foreign rivals. When other countries try to close comparative advantages held by the US companies, the US exports may reduce. Thirdly, the political environment is something that cannot be ignored when considering the global trading. Politics is always adding uncertainties to the world economy as well as the global trading network. Therefore, the US exports as well as imports could go both directions due to the political uncertainties.

Overall, within a stable global political environment, the US international deficit may continue to decrease, when the US government is giving more benefits to the US companies.

Value of land

Big landlords have often been attacked by left-wing politicians, as they are considered to be too wealthy and powerful to make resources and wealth flow across different classes, leading to a reduction in people’s incentives and productivity. Therefore, the wealth and land owned by big landlords should be given away at least partially. In China, individuals do not own private land, all land belongs to the state. Ownership of land could sometimes provide incentives for some people, as they could have goals such as owning some private land after retiring from their hard-working careers. Therefore, giving ownership to individuals is not something that could hurt the society. I also believe that the values of land would become decreasing over time. 

In modern eras, people are able to use land more effectively, as we build sky-high buildings, so we are able to locate more people with the limited land. In addition, the value of the land without natural resources is also dependent of the distances to key locations. However, when the speeds of transport and communication are increasing, the values of location decrease over time. In addition, it is also possible for our human beings to have more land in the future if we can actually conquer the Mars.

As the functions of having land is to collect resources from land, to have living room, to be close to key resources, when the functions are weakened, the values of land will keep dropping. The current housing price rise is still caused by relatively poor technology (in transporting and communication) and the high rate of population growth; when the population growth rate drops and our technologies develop further, land will not be valuable resources any more and the value will eventually drop.

Products with low marginal costs

There have been many products with low marginal costs, especially in the E-entertainment field. These products, especially those with high qualities, have huge lump sum costs for their research and development sectors. These companies could be considered to have higher risks as well as higher returns to compensate the high risks, they cannot efficiently reduce costs by reducing production when they find sales do not perform well and they are also able to boost their profits as they do not need to spend a lot on increasing their productions.

However, this is not necessarily true. Although it may not require many resources for further production, it does not mean there is no extra expenditure after the product is innovated and produced. For example, its spending on the advertisement could be correlated with its sales, Tencent has spent billions on advertising its most popular game, League of Legend, in order to gain the current popularity. Moreover, there is another field that companies need to spend: anti-pirate. Because of the low costs of production, it is easy to be copied and private versions could flood the market and take profits from the companies. Therefore, the companies have to put many resources into anti-pirate actions. In addition, they also need to product add-on products in order to attract more consumers.

Overall, those companies, whose products tend to have extremely low or even no marginal costs of production, are bearing high risk; therefore, I do not see them as good investment opportunities, unless they can effectively avoid pirates and dominate their own markets.

Moving forward or staying in the safe zone

Especially when Trump decided to pull the US out of the Paris Agreement, the US seems to stay conservative and want to maintain its advantages and strengths in the coal industry. The US President Trump in many occasions promised to the coal workers that he would bring back jobs for the coal workers. However, from the entire world economy or technology development, there is a trend that sustainable renewable energy is going to replace the traditional fossil fuel. Such circumstance also happens in many other sectors when those who stand at advantageous positions have higher opportunities costs to adopt to new technologies as they need to abandon its existing advantages and bear the risk of not gaining advantages in new sectors.

The ones with existing advantages and strengths do not always have advantages over other small opponents, as they are too big to be flexible and adopt new technologies or strategies. This problem is even more obvious in the infrastructure building. In many developed countries, they have relatively poorer infrastructure. In the US, the New York City’s underground system is relatively poor and is not the first choice for many citizens in the city. Though in London the underground system is the first choice for many people, the room of the trains is tiny and there is no network (though recent years the stations have public wifi hotspots).

However, in some countries which recently develop including Japan and Singapore, the infrastructure is much more modern, Even Germany could be counted as such country, as its old infrastructure had been largely destroyed during the second world war, its current infrastructure was built after the second world war. For those developed countries with complete transport and other infrastructural systems for long time, they are struggling to make decisions on whether or not they should upgrade their current systems, as the costs are incredibly high and there is some risk that the current available systems may need another upgrade after they adopt the new system. In addition, many of these countries have large expenditures on other fields, including education, national defence, welfare system and etc. Furthermore, upgrading infrastructure have long term and moderate impacts; however, there are some fields that can immediate and crucial impacts, the electoral political system makes politicians prefer those immediate policies rather than long term policies. Therefore, the decision of upgrading infrastructural systems is hardly made by the politicians in these developed countries.