Consumer Perceptions of Commodity Characteristics: Implications for Choice and Well-Being

Abstract

Consumers base market choices on beliefs about the properties of commodities. Invoking Lancaster?s characteristics approach, we explore the implications for consumer well-being of such beliefs being incorrect. Following an examination of the welfare cost of inaccurate beliefs, we address the question: do more accurate beliefs necessarily result in greater well-being? The impacts of changes in prices and income on well-being are then explored and some implications are drawn for the use of compensating variation. Finally, we contrast alternative perspectives on what constitutes the appropriate measurement of welfare where consumers? beliefs about what they are actually consuming are mistaken.