A Discrete/Continuous Choice Model on the Nonconvex Budget Set

Koji Miyawaki, Yasuhiro Omori () and Akira Hibiki

No CIRJE-F-881, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: The decreasing block rate pricing is a nonlinear price system often used for public utility services. The residential gas services in Japan and the United Kingdom are provided under this price schedule. The discrete/continuous choice approach is used to analyze the demand under decreasing block rate pricing. However, the nonlinearity problem, which has not been examined in previous studies, arises because a consumer's budget set (a set of affordable consumption amounts) is nonconvex and, hence, the resulting model includes highly nonlinear functions. To address this problem, we propose a feasible, efficient method of demand on the nonconvex budget. The advantages of our method are as follows: (i) the construction of an efficient Markov chain Monte Carlo algorithm with an efficient blanket based on the Hermite-Hadamard integral inequality and the power-mean inequality, (ii) the explicit consideration of the (highly nonlinear) separability condition, which often makes numerical likelihood maximization difficult, and (iii) the introduction of normal disturbance into the discrete/continuous choice model on the nonconvex budget set. The proposed method is applied to estimate the Japanese residential gas demand function and evaluate the effect of price schedule changes as a policy experiment.

Pages: 41 pages
Date: 2013-03
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Related works:
Journal Article: A discrete/continuous choice model on a nonconvex budget set (2018)
Working Paper: A Discrete/Continuous Choice Model on a Nonconvex Budget Set (2014)
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