Munich Personal RePEc Archive

Consumption-leisure complementarity versus income elasticity of demand under equilibrium price dispersion

Malakhov, Sergey (2019): Consumption-leisure complementarity versus income elasticity of demand under equilibrium price dispersion.

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Abstract

If the time horizon for consumption is divided between labor, search, and leisure, the search represents any activity, which decreases labor costs of the purchase price. The search costs are allocated between pre-purchase search and after-purchase treatment of the bought item, including shopping and home production. While these activities reduce leisure time and might be pleasurable, the search does not enter directly into the consumption-leisure utility function. The search determines the equilibrium price reduction, which creates marginal savings on purchase and serves as the part of the budget constraint to the optimal consumption-leisure choice under the equilibrium price dispersion. In this way the search provides both the consumption-leisure substitutability and complementarity. The income elasticity of demand produces the trade-off between efficiency and pleasure for both pre-purchase search and after-purchase treatment. The search for inelastic demand is very efficient in malls while the search for elastic demand is more pleasurable either like the habit of leisurely shopping in boutiques or in the form of the willingness to take care of purchased big-ticket items. The trade-off between efficiency and pleasure of the after-purchase treatment including home production becomes clear on the analytical level of the attributes of the purchased item when the demand for cars is analyzed as the demand for mileage, the demand for trees in gardening is observed like the demand for fruits, and the demand for vinyl disks depends on number of records of songs and symphonies. The income elastic demand of attributes hides the shift from the “common model” of behavior to the “leisure model” when consumers purchase excessive and unnecessary quantity of attributes that gets the negative marginal utility of consumption.

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