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Preferences, Utility, and Demand. by J. S. Chipman

Review by: Tapas MajumdarThe Economic Journal, Vol. 83, No. 330 (Jun., 1973), pp. 549-551Published by: Wiley on behalf of the Royal Economic Society

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1973] CHIPMAN ET AL.: (ED.); PREFERENCES, UTILITY, AND DEMAND 549

incorporating time-lags, first within the context of the simple two-person,

two-choice situation and subsequently generalising the analysis to a many-

person, many-choice situation. In the process of doing this the author

raises many interesting points, but at times things do get a bit tedious. Oneissue which is given a lot ofjustifiable attention at various points throughout

the book is the difference in the speed of response as between different

aggressive policies. The author argues that one would expect a longer

retaliatory lag for advertising than for price. On the basis of this, he suggests

that we might expect a greater degree of collusive behaviour in the case of

price than we would expect in the case of advertising, since everyone

recognises that a price cut will be rapidly met by rivals similarly cutting their

prices, whereas there are transitional profits to be made from aggressiveadvertising so that collusion breaks down. He quotes the evidence of real

world behaviour to support this prediction. However, one can put forward

counter arguments, both theoretical and empirical. First the speed of

retaliation to price cuts depends importantly on how easy it is to detect

price-cutting. Thus price-cutting can take place by allowing actual trans-

action prices to fall below list prices and by changing the quality of the

product via changes in the bundle of characteristics the product possesses,

as well as by simple, and obvious, changes in the list price of a constant-

quality product. All this will mean that the retaliatory lag is increased and

thus price becomes an aggressive weapon whereby transitory profits may be

achieved. These arguments are supported by recent results which suggest

that the degree of collusion over advertising may be greater than for price

in certain markets for durable goods where quality change can be a quite

complicated phenomenon.

The last chapter includes an interesting reference to the Cournot model,

in terms of the implications of assuming various lags in adjustment, and some

useful comments on the welfare implications of oligopoly as suggested by theauthor's results, together with an appendix extending the perfectly competi-

tive model to include advertising. His comments on the control of oligo-

poly are rather limited and could be extended in other obvious directions.

KEITH COWLING

University f Warwick.

Preferences,Utility, and Demand. A Minnesota Symposium. Edited by

J. S. CHIPMAN et al. (New York: Harcourt Brace Jovanovich Ltd.,1972. Pp. vi + 510.)

FIFTEEN of the twenty contributions comprising this major Minnesota

symposium make up the volume's Part I and are the work of nine contem-

porary stalwarts: John Chipman, Leonid Hurwicz, Marcel Richter, Hugo

Sonnenschein, Melvyn Berger, W. M. Gorman, Donald Katzner, Norman

Meyers and Hirofumi Uzawa. There is considerable cross-referencing







550 THE ECONOMIC JOURNAL [JUNE

among these fifteen papers which together represent the most up-to-datestatement of the foundations of, and the formal relationships among, theclassical theories of preference,utility and demand. The otherfive contribu-

tions to the symposium constituting Part II are brought back from somememorable though, to many of us, almostforgotten pages of history. Theseare fully annotated translations nto English-and for this all praiseis due toJohn Chipman-of five classicpapers by Antonelli (1886), Volterra (1906),Pareto (1906), Frisch (1926) and Franz Alt (1936). Part III of the volumeis a comprehensivebibliography.

The twenty papersshare the common aim of improvingour understand-ing of questions which we shall reconstruct below in somewhat simplified

forms:1. Froma preferenceelation o its representationWhat restrictions on a preference relation will guarantee that it

generates a numerical utility function or any other form of representa-tion of specified properties?

2. From herepresentationf a preferenceelation o demandWhat restriction on the representation of a preference relation

guarantees that it generates a demand function (or correspondence)of

specified properties?3. Fromdemand orking ack o therepresentationf a preferenceelation

What restrictionson a demand function will guarantee that it isderivablefrom somerepresentationof a preferencerelation orfromsomepreferencerelation at all?

4. Fromrevealedreferenceather hanpreferenceopropertiesf demandWhat conditions on observeddemand will guarantee specified

properties (such as continuity) for the demand function ?

To commend each one of these splendid contributions would be botheasy and right; finding fault with any would almost everywhere amountmerely to being captious. Only within the bounds set by this observationI raise the following two questions.

First, what is rational choice? To introduce Richter's definition, let Xbe the set of alternatives, R the collection of some specified subsets of X.We shall call any element B of R, a budget. The pair <X,R> is a budgetspace. Choices are made out of budgets. The choice function h, defined

on M, assigns to each B

-

9, a subset h(B) of B. The set h(B) will becalled the choiceor B. A preference relation G on <X, > is defined byRichter to rationalisechoice h if for every B ce- , h(B) - {x: x B &

y, xGy}. Whenever a choice h admits a rationalisation G, h is a rationalchoice; otherwise, h is an irrational hoice.

There can be no quarrelling with definitions, but speaking introspec-tively, what is basicabout rationality? Is it necessarily he consistencyof thepreference relation as we always seem to imply? Or is it a wider kind







1973] GEORGESCU-ROEGEN: THE ENTROPY LAW 551

of consistency embodied in predictability of behaviour? If it is the latterthen the observation that an individual defines h(Bl) = {b} when B1-{a, b, c} and h(B2) = {a} when B2 = {a, b} does not make h irrational for h

is still predictable in a non-trivial way so long as the budget is known.h, according to the predictability criterion, would be truly irrational if andonly if for all B E9, h(B) - B, so that choice is reduced to a genuine randomprocess.

My second question is: what happens to Samuelson's Weak Axiomwhen the choice set h(B) is not necessarilya singleton? How does an axiomof revealed preference allow for demand correspondencesh generated byindifferencecurves with flat or thick portions? My own answer elsewhere

has been to rely on the more is better postulate, sacrificing the thickportions to save the flat. One could then distinguish between border andinterior points of budget sets and say that the chosen (border) point q in asituation is

(a) revealed preferredto every interiorpoint, in Samuelson'ssense;and

(b) revealed preferredto every border point q', in the sense that q'cannot be chosen in any situation in which q itself is an interiorpoint.

But Hurwicz and Richter tackle this situation quite differently by intro-ducing what is called the Congruence Axiom: for any x, y e X andany B e , if x e h(B), y e B, and y is revealed (directly or indirectly)preferredto x, then y Eh(B).

Clearly, Samuelson'sWeak Axiom implies the CongruenceAxiom. Infact the Weak Axiom cannot be weakened any further than the Congruence

Axiom, because at this point it ceases to be operationally meaningful. Itcan no longer do what every revealed preference axiom must do: say

what constitutes an inadmissible choice. It relaxes two-term consistencybut puts nothing back in its place. How then does the new revealedprefer-ence theory distinguishindifferencefrom plain irrationality?

TAPAS MAJUMDAR

JawaharlalNehruUniversity,New Delhi.

Thle EntropyLaw and the EconomicProcess. By N. GEORGESCU-ROEGEN.

(Cambridge, Massachusetts: Harvard University Press, 1971. Pp.xv + 457. $7.50.)

THEEntropy Law is capable of a number of impressionisticbut usefulinterpretations; that things go from bad to worse; that order breaks downinto chaos; that there is a tendency in all systems towardsgreater random-ness; or (to be more precise) that energy moves from a free state where itcan be used, to a latent state where it cannot.





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