What is Revealed Preference?

Malcolm Tatum

Revealed preference is a theory that has to do with determining the buying preferences of consumers by observing how those consumers go about making their purchases. The idea behind this approach is to make note of the stages that consumers go through when deciding between a selection of similar products and ultimately making the decision to choose a specific option. The product chosen is considered to be the revealed preference of the consumer, based on his or her individual process of comparison, evaluation and ultimate selection of one product over all other options.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The basic concept of revealed preference has been around since the latter part of the 1930s. Developed by Paul Samuelson, the theory held that by observing the methods employed by consumers when choosing products it was possible to identify which considerations ultimately influenced the purchase of a particular product. Based on the data obtained from the observations, manufacturers and retailers could exploit those influences in a manner that would motivate more consumers to make the same decision, ultimately generating additional profits for makers and sellers alike.

Along with using revealed preference to develop strategies that are geared toward increasing sales of existing products, the data revealed by consumers during the selection process can also pave the way for developing new product lines. For example, the information obtained may lead the manufacturer of a floor cleaning product to determine that using the same preferences exhibited by consumers, including factors such as efficiency, scent, and price, to develop a new window cleaning product would result in the successful launch of that new product. From this perspective, revealed preference is not only a tool for understanding why consumers buy the products they do rather than other offerings in the market, but also what must be done to entice those same consumers to embrace a new product over other options that are already available to them.

Revealed preference is only one of several types of consumer analysis that companies use to gauge public reaction to their product lines. Often, this particular consumer theory is employed along with other strategies for evaluating the potential of new products in development, and also the enhancement of products that are already available in the marketplace. There are also different approaches to revealed preference, in that not all assessments of consumer buying habits allow for the same set of considerations that consumers employ in their decision making.

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