Discrete-Choice Models and Representative Consumer Theory

26 Pages Posted: 15 Jun 2022 Last revised: 6 Feb 2024

See all articles by Jean-Pierre Dubé

Jean-Pierre Dubé

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Marketing Science Institute (MSI)

Joonhwi Joo

University of Texas at Dallas - Naveen Jindal School of Management

Kyeongbae Kim

Sejong University - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: January 22, 2024

Abstract

Abstract We establish the integrability of demand for a broad class of discrete/continuous choice additive homothetic random-utility models of individual consumer behavior with perfect substitutes preferences (linear indifference curves) and divisible goods. We derive the corresponding indirect utility function and then establish a representative consumer formulation for this entire class of models. The representative consumer is always normative, facilitating aggregate welfare analysis. These findings should be of interest to the literature in macro, trade, industrial organization, labor, and ideal price index measurement that use representative consumer models, such as CES and its variants. Our results generalize such representative consumer formulations to the broad, empirically-relevant class of models of behavior that are routinely used in the discrete/continuous choice analysis of micro data, including specifications that do not suffer from the IIA property and that allow for heterogeneous consumer preferences and incomes. These flexible discrete/continuous choice formulations also overcome many of the known limitations of CES and its variants for equilibrium prices and markups, trade liberalization effects and welfare analysis. We also discuss quasi-linear integrability in the case where products are indivisible and integrability no longer holds.

Keywords: discrete/continuous choice models, random utility, representative consumer models, welfare analysis

JEL Classification: C43, D01, D11, D60, E1, L00, M3

Suggested Citation

Dube, Jean-Pierre H. and Joo, Joonhwi and Kim, Kyeongbae, Discrete-Choice Models and Representative Consumer Theory (January 22, 2024). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2022-75, Available at SSRN: https://ssrn.com/abstract=4136712 or http://dx.doi.org/10.2139/ssrn.4136712

Jean-Pierre H. Dube (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Marketing Science Institute (MSI) ( email )

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Cambridge, MA 02138-5396
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Joonhwi Joo

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX TX 75083-0688
United States
75080 (Fax)

Kyeongbae Kim

Sejong University - Department of Economics ( email )

143-743 Seoul
Korea, Republic of (South Korea)

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