American Economic Review: Insights
ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)
Moderate Utility
American Economic Review: Insights
vol. 6,
no. 2, June 2024
(pp. 176–95)
Abstract
Hotelling's and Salop's spatial competition models, as well as nested logit, covariance probit, elimination-by-aspects, and several other well-known discrete choice models, belong to the class of moderate utility models, where binary choices are a function of the ratio between utility difference and a product differentiation index satisfying the properties of a distance metric. We provide a behavioral foundation for this class of models. Our main result establishes that moderate utility has a single, directly testable implication: choice probabilities are moderately transitive. We use our characterization to show how the model achieves a useful compromise between explanatory power and predictive power.Citation
He, Junnan, and Paulo Natenzon. 2024. "Moderate Utility." American Economic Review: Insights, 6 (2): 176–95. DOI: 10.1257/aeri.20230085Additional Materials
JEL Classification
- C25 Single Equation Models; Single Variables: Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
- D11 Consumer Economics: Theory
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making