Moderate Utility

Abstract

Hotelling’s and Salop’s spatial competition models, as well as nested logit, covariance probit, elimination-by-aspects, and several other well-known discrete choice models, belong to the class of moderate utility models, where binary choices are a function of the ratio between utility difference and a product differentiation index satisfying the properties of a distance metric. We provide a behavioral foundation for this class of models. Our main result establishes that moderate utility has a single, directly testable implication: choice probabilities are moderately transitive. We use our characterization to show how the model achieves a useful compromise between explanatory power and predictive power. (JEL C25, D11, D91)