Taste Heterogeneity, IIA, and the Similarity Critique

Thomas J. Steenburgh () and Andrew Ainslie ()
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Thomas J. Steenburgh: Harvard Business School, Marketing Unit
Andrew Ainslie: UCLA Anderson, School of Management

No 09-049, Harvard Business School Working Papers from Harvard Business School

Abstract: The purpose of this paper is to show that allowing for taste heterogeneity does not address the similarity critique of discrete-choice models. Although IIA may technically be broken in aggregate, the mixed logit model allows neither a given individual nor the population as a whole to behave with perfect substitution when facing perfect substitutes. Thus, the mixed logit model implies that individuals behave inconsistently across choice sets. Estimating the mixed logit on data in which individuals do behave consistently can result in biased parameter estimates, with the individuals' tastes for desirable attributes being systemically undervalued.

Keywords: Heterogeneity; Mixed Logit; Independence from Irrelevant Alternatives; IIA; Similarity Critique; Ecological Fallacy (search for similar items in EconPapers)
Pages: 26 pages
Date: 2008-09
New Economics Papers: this item is included in nep-dcm and nep-ecm
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Citations: View citations in EconPapers (1)

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