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

Wong, Maisy (2010): The Relationship between Marginal Willingness-to-Pay in the Hedonic and Discrete Choice Models.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Marginal willingness-to-pay, Hedonic models, discrete choice models
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R30 - General

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