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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.

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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.

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