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Moderate Utility

Author

Listed:
  • Junnan He
  • Paulo Natenzon

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.

Suggested Citation

  • Junnan He & Paulo Natenzon, 2024. "Moderate Utility," American Economic Review: Insights, American Economic Association, vol. 6(2), pages 176-195, June.
    • Handle: RePEc:aea:aerins:v:6:y:2024:i:2:p:176-95
    DOI: 10.1257/aeri.20230085
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    More about this item

    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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