Rival firms produce products with a multitude of characteristics (Lancaster, 1966) and consumers choose to purchase those products that most closely match their ideal set of characteristics. Orthodox production theory ignores the view that products are bundles of characteristics and consequently it offers no analysis of how to divide limited production budgets between different characteristics. It also ignores the heterogeneity of firms with respect to their capabilities (Penrose, 1959, Richardson, 1972) and the fact that production decisions are undertaken in historical time (Nelson & Winter, 1982). Each of these factors has implications for the firm’s feasible productive set at any point in time and its production strategy. Here a new framework of analysis of production is offered which incorporates these missing features. In addition it incorporates lessons from behavioural consumer economics (Earl, 1986), which recognises the possibility that consumers may have hierarchical preferences over characteristics, rather than trade-offs between them, and that they will form aspiration levels for each characteristic in terms of actual or perceived performance.
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