Comments on a Stochastic Inventory Model and a Normative Deficit Model

Richard F. Yalch, University of Washington
[ to cite ]:
Richard F. Yalch (1976) ,"Comments on a Stochastic Inventory Model and a Normative Deficit Model", in NA - Advances in Consumer Research Volume 03, eds. Beverlee B. Anderson, Cincinnati, OH : Association for Consumer Research, Pages: 166-167.

Advances in Consumer Research Volume 3, 1976      Pages 166-167

COMMENTS ON A STOCHASTIC INVENTORY MODEL AND A NORMATIVE DEFICIT MODEL

Richard F. Yalch, University of Washington

The two papers by Beutler and Morris, Winter, and Beutler present novel perspectives of consumer behavior. In commenting on their contributions, I will attempt to identify the strengths and weaknesses to assist those interested in applying the models or further pursuing these lines of inquiry.

A STOCHASTIC INVENTORY MODEL

Beutler addresses the largely ignored issue of how consumers manage their financial resources in anticipation of uncertain incomes and expenditures. He applies a model previously developed to explain a business firm's asset management and demonstrates the potential utility of many financial and economic models. Three aspects of his model will be discussed, the appropriateness of the assumptions, the validation of the model, and the possibility of modifying the model to bring it more in line with extant consumer behavior research findings.

Appropriateness of the Assumptions

Although Beutler claims that he is able to derive the cost minimization decisions with only three basic assumptions, there are in fact quite a few more. It is important that these be acknowledged to forewarn anyone seeking to apply the model and to guide those interested in extending it. The first assumption, each household has an asset manager who acts to minimize the expected cost of managing the household's assets by following certain policy rules, actually assumes several behaviors. The first is that the household members manage their finances in concert or with one individual in control. Research suggests that purchases are typically divided according to interest and expertise (cf. Ferber & Lee, 1974), such that there may not be much coordination. Another, that the asset manager follows an (h-z) policy, requires that the cash balance falls to zero before there will be a transfer from short-term assets. Given the propensity for impulse buying, it would seem more likely that a positive balance would be desired at all times. Also, the assumption that the consumer is indifferent between holding currency and demand deposits is tenuous and neglects a decision of great interest to bank managers and economists.

Beutler's second major assumption is that asset inventories are stochastic, which is later modified to require equally likely increases or decreases in the cash balance at any point in time. This limits the model to families with nonpersistent income changes and is at odds with the fact that most families receive their income at known predetermined dates, i.e., end of the month.

On the basis of the first two explicit and many implicit assumptions, Beutler develops a model which differs from Miller and Orr's (1966) in only two ways. One is that a constant is added to the short-term asset balance, Zo, to reflect a desire to maintain a Positive balance but no reason is given for this desire. The other modification is that an independent variance is added to the short-term asset balance as the means to treat unexpected gains and savings for large purchases.

It is not clear why windfall gains would not be converted to long term assets.

The third major assumption is that the asset manager will act to minimize expected costs, which was also stated under assumption one. Beutler assumes that individuals are aware of the costs of holding different assets, but research suggests that this is rarely true (White, 1975). If consumers are not cognizant of the costs, it hardly seems likely that they will be able to minimize them. Beutler also assumes that consumers will consider the holding of real assets as costing the same as cash. A better approach might be to consider the investment motive for durable good purchases and treat it the same as long-term assets.

Model Validation

Beutler does not empirically validate his model but merely demonstrates that certain changes in the parameters would lead to the proper predicted behaviors. This is a reasonable first step in evaluating a simulation model, but is only a necessary and not sufficient condition for acceptance. Furthermore, since the model was not derived from a careful consideration of prior consumer behavior research findings, an empirical test would seem particularly desirable.

Extensions

The following modifications are proposed to bring the model more in line with our knowledge of consumer behavior. The effect these suggestions might have on the mathematical simplicity, apparently a major consideration in the present formulation, is not known but there is a clear tradeoff between developing a workable model and modeling the world as it really behaves.

1. Allow consumers to maintain a positive cash balance instead of requiring it to drop to zero before transferring short-term asset funds.

2. Separate the holding of currency from demand deposits by assigning different costs to each.

3. Consider what effect nonstationary incomes will have on the optimum levels.

4. Allow the minimum asset balance, Zo, to fluctuate with environmental changes.

5. Establish a more realistic cost to holding real assets.

A NORMATIVE DEFICIT MODEL

Morris, Winter, and Beutler criticize extant consumer behavior research because of the "narrow social psychological focus," failure to specify operationalizations. concern with selective demand, exclusion of cultural influences, and utilization of product attributes rather than consumer needs as the behavior determinants. These criticisms serve as the motivation for offering yet another model purported to explain and predict consumer behavior. In evaluating this model, it would be beneficial to consider the validity of their criticisms and their model's ability to overcome them.

Narrow Social Psychological Focus

It is true that social psychology has had the greatest impact on consumer behavior research, which is understandable given the problem setting, individuals making decisions on the basis of information and prior experiences. In fact, since the authors maintain the individual as the unit of analysis, it is not clear that their approach is significantly different. Also, the authors seem to misrepresent the limits of this approach. For example, although attitudes are frequently considered the most important explanatory variable, they are rarely the only variable considered. The recent interest in extended prediction models (Ryan & Bonfield, 1975) and situational factors (Belk, 1974) reflect this trend. Furthermore, the authors' proposal that consumers select products on the basis of their relative abilities to satisfy needs would appear to be very similar to the inclusion of an ideal product in a multiattribute or multidimensional scaling analysis of consumer attitudes.

Operationalization

Morris et al. are critical of the integrative consumer behavior models because the authors have neglected to specify exactly how the variables and relationships should be operationalized. Unfortunately, they are equally guilty of this and are even vague as to what is included in the model let alone indicating how it might be tested. For example, the exogenous variable, market factors, is defined as, "supply, demand, and their effect on price and the availability of goods and services.'' This could be interpreted as stating that consumer behavior is determined by the marketing activities of the firms in an industry, hardly a noteworthy contribution. Moreover, the analytical method for estimating the relative influence of each variable is equally unclear. With lagged terms, two-way causation (consequent behavior is assumed to influence predispositions), and direct and indirect influences, this would not seem to be an easy task.

Product Choice Decision

In considering the decision to purchase a product instead of the choice of one brand over another, the authors point out that researchers have neglected an important aspect of consumer behavior. Apparently, many feel that the brand choice decision is of more importance since firms benefit directly by stimulating selective demand and only partially from primary demand changes. Recent concerns over inherent shortages and the consumption of undesirable products justify paying more attention to primary demand.

Unfortunately, the authors may be overstating their model's ability to explain primary demand decisions because of prior work on house buying. The assumption that the purchase of nondurable goods also comes about after a consideration of which satisfies the greatest need may not be valid. Consumers may be torn between purchasing a new house or car, but it is doubtful whether they consider toothpastes, haircuts, and cereals in the same manner. The authors might be wise to limit their model to the choice between consumer durable goods.

Cultural Norms

The authors argue that product choices are based on the relevant cultural norms as well as one's own desires. That is, one might desire a game room because others think it is important to have. This appears to be similar to Fishbein's (1967) proposition that intentions are based partially on social normative beliefs. Questions arise as to whether these are best measured by asking the individual for his perception of the cultural norms or to try to assess them in some other manner. The former has the advantage in that you can be certain that the individual is at least aware of the norm though responses may be biased by personal norms. The latter eliminates the bias but creates a problem in that many of the measured values may not be known by the subject. If so, it should not be considered as having an influence.

Consumer Needs

Recent consumer behavior research has been dominated by efforts to explain attitudes and behaviors on the basis of product attributes. Morris et al. propose that the true influence is the need that might be satisfied by the purchase of the product. However, in discussing their model they tend to focus on attributes rather than needs. For example, deficits are described in terms of the number of bedrooms needed not the sleeping needs that must be satisfied. The latter would allow the purchase of a sofa bed as a solution but the former would not. Thus, they have not followed through on their own recommendation.

Summary

Beutler has contributed to consumer behavior research by illustrating the close correspondence to business decision making, investigating savings rather than purchases, using finance as the theoretical framework, and developing a normative model. In evaluating this noteworthy effort, one should be aware of the many simplifying assumptions. Morris et al. have proposed a model that is consistent with the marketing concept in that need satisfaction is viewed as the motivation for product choices. The potential contribution should be greatest for consumer durable good purchases. Both models await empirical validation.

REFERENCES

R. W. Belk, "An Exploratory Assessment of Situational Effects in Buyer Behavior," Journal of Marketing Research, 11 (May 1974), 156-163.

R. Ferber and L. C. Lee, "Husband-Wife Influence in Family Purchasing Behavior," Journal of Consumer Research, 1 (June 1974), 43-50.

M. Fishbein, "Attitude and the Prediction of Behavior," in M. Fishbein, Ed., Readings in Attitude Theory and Measurement. (New York: Wiley, 1967), 477-492.

M. H. Miller and D. Orr, "A Model for the Demand for Money by Firms," Quarterly Journal of Economics, 80 (1966), 413-435.

M. J. Ryan and E. H. Bonfield, "The Fishbein Extended Model and Consumer Behavior," Journal of Consumer Research, 2 (September 1975), 118-136.

K. J. White, "Consumer Choice and Use of Bank Credit Cards," Journal of Consumer Research, 2 (June 1975), 10-18.

----------------------------------------