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Thresholds and Transitivity in Stochastic Consumer Choice: A Multinomial Logit Analysis

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  • S. K. Lioukas

    (Public Power Corporation, Athens, Greece)

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    Abstract

    In previous work, thresholds have been introduced to describe situations where the consumer is indifferent between any two alternatives. Krishnan (Krishnan, K. S. 1977. Incorporating thresholds of indifference in probabilistic choice models. Management Sci. 23 (July) 1224--1233.) formalised thresholds as minimum perceivable differences between the utilities of the alternatives compared and incorporated such thresholds into the binary logit model. The present paper provides an extension and application of the theory to situations where the decision maker is confronted with more than two alternatives. In such situations thresholds can lead to systematic and predictable intransitivity of indifference, violating a basic postulate of utility theory. Explicit probabilities of transitive and intransitive choices are derived within the framework of the multinomial logit model and the stochastic consumer theory associated with this model. The empirical applicability and managerial usefulness of the proposed theory is illustrated using a transportation example with three alternatives. The data employed reflect actual travellers' use of interurban transport modes in Greece. Parameters are estimated by a maximum-likelihood technique, based on a gradient search method. The results support the existence of thresholds. The application has important policy implications.

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    File URL: http://dx.doi.org/10.1287/mnsc.30.1.110
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 30 (1984)
    Issue (Month): 1 (January)
    Pages: 110-122

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    Handle: RePEc:inm:ormnsc:v:30:y:1984:i:1:p:110-122

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    Related research

    Keywords: quantal choice; stochastic utility; thresholds; intransitivity; transport mode choice;

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    Cited by:
    1. Wayne DeSarbo & Kamel Jedidi & Joel Steckel, 1991. "A stochastic multidimensional scaling procedure for the empirical determination of convex indifference curves for preference/choice analysis," Psychometrika, Springer, vol. 56(2), pages 279-307, June.
    2. Cantillo, Víctor & Amaya, Johanna & Ortúzar, J. de D., 2010. "Thresholds and indifference in stated choice surveys," Transportation Research Part B: Methodological, Elsevier, vol. 44(6), pages 753-763, July.
    3. Andy Obermeyer & Bernhard Wieland & Christos Evangelinos, 2014. "Die ökonomische Bewertung kleiner Reisezeiteinsparungen," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 234(1), pages 44-69, January.

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