Economic Models of Choice

36 Pages Posted: 31 Aug 2015

See all articles by Greg M. Allenby

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics

Jaehwan Kim

Korea University Business School (KUBS)

Peter E. Rossi

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: August 25, 2015

Abstract

This chapter provides an introduction to choice models based on the principle of direct utility maximization. Models of direct utility are characterized by specifications of the utility function and accompanying budget constraint that allows separation of what is gained (i.e., utility) from that which is given up in an exchange. Direct utility maximization rationalizes observed choice as arising from goal-oriented consumers who are resource constrained. Marketing data overwhelmingly reflects goal-oriented behavior on the part of consumers in the high rate of zero’s present in disaggregate data, indicating that most people choose to not purchase most products that are available. By developing alternative models of direct utility maximization, we hope to spur additional research on utility formation and a more in-depth understanding of optimal firm reaction to the demands and constraints of consumers.

Keywords: Direct Utility Models, Budget Constraint, Error Specification

JEL Classification: C25, C40, M31

Suggested Citation

Allenby, Greg M. and Kim, Jaehwan and Rossi, Peter E., Economic Models of Choice (August 25, 2015). Available at SSRN: https://ssrn.com/abstract=2650572 or http://dx.doi.org/10.2139/ssrn.2650572

Greg M. Allenby (Contact Author)

Ohio State University (OSU) - Department of Marketing and Logistics ( email )

Fisher Hall 524
2100 Neil Ave
Columbus, OH 43210
United States

Jaehwan Kim

Korea University Business School (KUBS) ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea
822.3290.2603 (Phone)
822.922.7220 (Fax)

Peter E. Rossi

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
773-294-8616 (Phone)

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