Just-noticeable difference as a behavioural foundation of the critical cost-efficiency

Pawel Dziewulski

No 848, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract Critical cost-efficiency index (or CCEI), proposed in Afriat (1972, 1973) and Varian (1990), is the most commonly used measure of revealed preference violations. By representing consumer preference with interval orders, as in Fishburn (1970), we show that this index is equivalent to a particular notion of the just-noticeable difference, i.e., a measure of dissimilarity between alternatives that is sufficient for the agent to tell them apart. Therefore, CCEI can be interpreted as the consumer's cognitive inability to discriminate among options. This characterisation sheds new light on the existing empirical findings.

Keywords: utility maximisation; generalised axiom of revealed preference; critical cost-efficiency index; interval order; just-noticeable difference (search for similar items in EconPapers)
JEL-codes: C14 C60 C61 D11 D12 (search for similar items in EconPapers)
Date: 2018-04-05
New Economics Papers: this item is included in nep-upt
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