A discrete/continuous choice model on a nonconvex budget set

Koji Miyawaki, Yasuhiro Omori () and Akira Hibiki

Econometric Reviews, 2018, vol. 37, issue 2, 89-113

Abstract: Decreasing block rate pricing is a nonlinear price system often used for public utility services. 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 estimation on the nonconvex budget. The advantages of our method are as follows: (i) the construction of an 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.

Date: 2018
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Related works:
Working Paper: A Discrete/Continuous Choice Model on a Nonconvex Budget Set (2014)
Working Paper: A Discrete/Continuous Choice Model on the Nonconvex Budget Set (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:emetrv:v:37:y:2018:i:2:p:89-113

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DOI: 10.1080/07474938.2015.1032166

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