In a sense, people do not buy commodities for the sake of the commodities themselves; they desire one or more characteristics that each commodity provides. When two goods are close substitutes for one another, they provide similar arrays of characteristics. Imagine, as an example, a person who is on the fence between going to the opera or having a fine meal in an elegant restaurant on a given evening. Food and music are not by any means the same thing, but perhaps either choice will be “entertainment” from this person's point of view. Both will provide festive surroundings, and supposing they are to be enjoyed with another person, both will also provide companionship and the pleasure of a shared experience.

An alternative to the traditional view that utility is a function of the commodity bundle that a person consumes is the view that each good provides an array of basic characteristics, or attributes, and that a commodity bundle is best represented by the total amount of attributes in it. Utility is a function of attributes consumed. It is this approach to the analysis of market behavior that has been pioneered by Lancaster (1966; 1971; 1979) and forms the basis for this chapter. Lancaster's approach, in a strict sense, is discussed, followed by an examination of a modified version of the characteristics approach that is much closer to traditional analysis using commodities.