This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. Journals
  3. American Economic Review: Insights
  4. Forthcoming Articles
  5. Moderate Utility

Moderate Utility

  • Junnan He
  • Paulo Natenzon
American Economic Review: Insights (Forthcoming)

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.

Downloads