Statistical Models of Consumer Behavior with Heterogeneous Values and Constraints.

In a market with heterogeneous individuals, the fact that a particular group of individuals are the consumers of a particular product already indicates that there exist systematic differences between them and the average person. Simple tools from statistical theory are used here to analyze the implications of consumer diversity. It is argued that an increase in consumer diversity will increase the gains from trade, and that there is a "shadow price of heterogeneity" associated with product quality. Throughout the discussion, the significance of consumer self-selection and the distinction between "average" and "marginal" will be emphasized. Copyright 1990 by Oxford University Press.