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The Relationship between Marginal Willingness-to-Pay in the Hedonic and Discrete Choice Models

Author

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  • Wong, Maisy

Abstract

The two primary approaches to estimate marginal willingness-to-pay (MWTP) for differentiated goods are hedonics (Rosen, 1974) and discrete choice models (McFadden, 1974). Researchers have alluded to a duality between both models. The innovation in this paper is to show that the hedonic MWTP can be written as a function of choice probabilities in the discrete choice model. I find that the hedonic method estimates a weighted average of marginal utilities where higher weights are associated with consumer types whose choice probabilities indicate a high variance regarding their choice (marginal consumers). This weight decreases as choice probabilities approach 0 or 1.

Suggested Citation

  • Wong, Maisy, 2010. "The Relationship between Marginal Willingness-to-Pay in the Hedonic and Discrete Choice Models," MPRA Paper 51218, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:51218
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    File URL: https://mpra.ub.uni-muenchen.de/51218/1/MaisyWong_HedonicDiscrete.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Marginal willingness-to-pay; Hedonic models; discrete choice models;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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