Utility is "a measure of the satisfaction derived from purchasing a good or service." The theory of rational consumer choice explains how consumers decide what to buy. It assumes that consumers are rational, have perfect information and aim to maximise their utility by choosing the combination of goods and services that gives them the greatest satisfaction from their income. Whether consumers will always seek to maximise their utility therefore depends on whether these assumptions always hold. This essay argues that they do not. Utility maximisation is a reasonable prediction when the assumptions hold, but bounded rationality, bounded self-control and imperfect information mean that consumers often do not maximise their utility in reality.
When the assumptions hold: consumers maximise utility: Rational consumer choice assumes, first, that consumers can rank the available alternatives consistently. A consumer who prefers A to B and B to C must also prefer A to C. Second, it assumes that consumers use these preferences to maximise their utility within their budget. Third, it assumes perfect information: consumers know the prices and the relevant characteristics of all the options they face. If all three assumptions hold, consumers will always choose the option that maximises their utility.
Consider a consumer choosing between Phone 1, Phone 2 and Phone 3, which all cost the same and are within their budget. With perfect information, the consumer knows the features and benefits of each phone, such as battery life, camera quality and storage. With consistent preferences, if they prefer Phone 1 to Phone 2 and Phone 2 to Phone 3, they must also prefer Phone 1 to Phone 3, so Phone 1 is their highest-ranked option. Because they aim to maximise utility, the rational consumer chooses Phone 1, which gives the greatest utility of all the options they can afford. This supports the view: when all the assumptions of rational consumer choice hold, consumers will seek to maximise their utility.
However, these assumptions do not necessarily hold in reality. Behavioural economics, which "adds elements of psychology to traditional models," challenges each of them. Bounded rationality, bounded self-control and imperfect information each give a different reason why consumers may not maximise their utility.
Bounded rationality: Bounded rationality is the idea that consumers are rational only within limits. Their rationality is limited by insufficient information, the cost of obtaining information and the limited ability of the human mind to process large amounts of information. When a choice is complex, comparing every option fully may be too difficult or time-consuming. According to Herbert Simon, consumers therefore satisfice: they settle for a satisfactory option rather than searching for the best one. This challenges the view directly, because a consumer who satisfices is not seeking to maximise utility.
Choosing prescription-drug insurance in the United States shows this. Older Americans in the Medicare programme can choose between dozens of drug plans, each with different premiums and different coverage of medicines. Working out which plan is cheapest for a particular person's medicines is very demanding, and many consumers stay with the plan they already have. In one study, a group of consumers were sent a letter that brought together their own expected costs under each plan. They switched plans more often than a comparison group that did not receive the letter, 28% compared with 17%, and their predicted annual costs fell by about US$100 on average. The information had been available all along. What changed was that it became easier to process. This suggests that, without the letter, many consumers kept a more expensive plan than they needed because comparing plans was too difficult, not because the more expensive plan gave them more utility.
The example has limits. Some consumers may have stayed with their plan because they valued familiarity or trusted their insurer, so the cheapest plan would not necessarily have maximised every consumer's utility. Even so, the higher switching rate in the letter group shows that the difficulty of the comparison alone stopped many consumers from choosing their best option.
Bounded self-control: Bounded self-control means that consumers exercise self-control only within limits. They may plan a course of action that would maximise their utility but fail to follow it when an immediate temptation, or simple inertia, gets in the way. People may eat too much, spend too much or save too little, even when they know this is not in their best interest. In this case consumers may seek to maximise utility when they plan, but fail to achieve it when they act.
Gym memberships show this. A study of US gyms found that members who chose a contract with a flat monthly fee of over US$70 attended on average only about 4.3 times a month. They therefore paid more than US$17 per visit, even though they could have paid US$10 per visit with a ten-visit pass. When they signed up, these consumers expected to go often, and if they had followed that plan the monthly contract would have been the best choice. In reality, their limited self-control meant they went much less than planned, so they paid about 70% more per visit than necessary. Their choice did not minimise their monetary cost, despite the fact that they may have sought to maximise their utility.
The example has limits. Some members may have chosen the monthly contract on purpose, to motivate themselves to attend, which can be a rational response to known weak self-control. However, if consumers have to pay extra to protect themselves from their own future behaviour, this still shows that they cannot rely on carrying out the choices that would maximise their utility.
Imperfect information: Finally, rational consumer choice assumes that consumers have all the information they need, including the full price of each product to judge their options and make the best decision. In reality, information is often incomplete or hidden, and sellers may know more than buyers. Consumers may then try to maximise utility but make their choices based on wrong or incomplete information, so they choose options that they would not have chosen if they had been fully informed.
Hidden fees on online ticket sales show this. Many ticket websites advertise a low price and add compulsory fees only at the final stage of the purchase, so consumers do not see the full price when they compare options. A large experiment on the ticket website StubHub compared consumers who were shown the full price, including fees, from the start with consumers who saw the fees only at checkout. Those shown fees only at checkout spent about 21% more and were about 14% more likely to complete a purchase. If consumers had full information, how prices were presented should not affect what they buy. The difference therefore suggests that many consumers bought more expensive tickets than they would have chosen with full information.
The example has limits. It shows that consumers' choices change when information is hidden, but not exactly how much utility each consumer lost. Consumers can also respond by searching more carefully or using price comparison websites, and governments can require full prices to be shown from the start. These responses can reduce the information problem, but they cannot remove it entirely.
Rational consumer choice theory shows that consumers will maximise their utility when they have perfect information, consistent preferences and the ability to act on them, as in the simple choice between three phones. It remains a useful model for simple, familiar purchases where these conditions are close to being met. The view that consumers will always seek to maximise their utility is, however, too strong. Bounded rationality means consumers often satisfice rather than maximise when choices are complex. Bounded self-control means that even consumers who seek to maximise utility may fail to act on their plans. Imperfect information means consumers may make the wrong choices even when they try to make the best ones. The examples of Medicare plans, gym memberships and ticket fees show that these departures from utility maximisation can be substantial in real markets. Overall, consumers generally try to make choices that leave them better off, but how close they come to maximising utility depends on how complex the choice is, how much self-control it requires and how much information they have.