Revealed Preference
Candlefocus EditorThe three primary axioms of revealed preference theory, also referred to as 'cheap talk axioms', are weak axiom of revealed preference (WARP), strong axiom of revealed preference (SARP), and generalized axiom of revealed preference (GARP). WARP states that the consumer will always choose the option that maximizes utility. In other words, a consumer will never buy a bundle that is ranked below a bundle that he or she has already purchased.
SARP is slightly more complex. It is based on the idea that a consumer's choice can be determined by his or her preferences. This means that, even with changing prices, income, or utility, the consumer will always go with the bundle that provides the highest level of utility.
GARP is the most complex of the three axioms. This states that the consumer's choice can be determined solely by his or her preferences. This assumption implies that consumer behavior will remain the same when prices, resources, or utility change.
Revealed preference theory is useful in both economics and marketing. In economics, it is used to explain consumer behavior and underlying preferences when making decisions about employment, investments, and asset allocations. In marketing, the theory is used to predict customer behavior, identify customer preferences, and understand consumer resource allocations.
Thus, Revealed Preference Theory, drawn upon the rational preferences of consumers and recognizing that consumer behavior is a reliable indicator of consumer preferences, serves as a helpful tool for predicting the customer behaviors, preferences and resource allocations that drive decisions in economics and marketing.