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

  • Wong, Maisy

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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File URL: https://mpra.ub.uni-muenchen.de/51218/1/MaisyWong_HedonicDiscrete.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51218.

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Date of creation: 2010
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Handle: RePEc:pra:mprapa:51218
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  18. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
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