Negative Returns

Diminishing Utility

The Law of Diminishing Marginal Utility states that after a Customer purchases a Product they are less likely to purchase the same Product again at the same time.

“The law of diminishing marginal utility is at the heart of the explanation of numerous economic phenomena, including time preference and the value of goods … The law says, first, that the marginal utility of each homogenous unit decreases as the supply of units increases (and vice versa); second, that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit (and vice versa). The first law denotes the law of diminishing marginal utility, the second law denotes the law of increasing total utility.”

The law may apply when the Customer is trying to simultaneously satisfy a range of needs from the Category. For example, the Customer may also be shopping for other members of the household, or the Customer may be planning on consuming the Products at different times.

This Market Simulation shows how to model Customers simultaneously buying multiple different Products from a Category when they are looking for not just quantity but variety.

This Case Study provides a high-level overview of the workflow without detailed explanation. It assumes you are already somewhat familiar with KNIME and Market Simulation. If not, start by reviewing the Building Blocks and Community Nodes.

Competitive Story

This Market Simulation is designed to model supermarket Customers buying frozen dinners for the upcoming week.

Some Customers have a clear preference and will repeatedly buy the same Product several times, while other Customers prefer to buy a variety of dishes. Some Customers will stock-up by buying many frozen dinners, while other Customers may just buy one or two dishes to supplement the other dinners they have during the week.

Frozen Dinners

There are 10,000 Customers in this Market and 6 types of frozen dinners:

  1. Beef,
  2. Pork,
  3. Chicken,
  4. Fish,
  5. Noodles, and
  6. Vegetarian.

The Prices of these frozen dinners range between $3.00 and $5.00 while the Willingness to Pay (WTP) of Customers varies normally around a Mean of either 4.0 or 5.0.

The Customers make 7 purchase decisions – one decision for each night of the upcoming week. They may choose to purchase any frozen dinner, may choose a variety of dinners, and may stop choosing altogether after any iteration.

Product Array

Customers make 7 selections from 6 types of frozen dinner and ‘No Sale’.

WTP Matrix

The WTP Matrix tracks the changing value of each dinner.

Market Loop

Within each of the 7 iteration loops, Customers decide which frozen dinner to purchase. If a Customers decides a dinner then the ‘Scale Purchased’ node will reduce their WTP for that dinner by a fixed rate of $1.00. This means during the next loop iteration, the Customer is less likely to pick the same frozen dinner again.

The final grouped results show that Customers typically purchase between 2 and 4 types of frozen dinner.

Purchase Decision

Customers decide which frozen dinner they want to buy.

Diminish Utility

The WTP of the purchased dinner is reduced by $1.00.

Final Results

Most Customers buy between 2 and 4 types of frozen dinner.