nep-dcm New Economics Papers
on Discrete Choice Models
Issue of 2011‒07‒13
three papers chosen by
Philip Yu
Hong Kong University

  1. Testing for IIA with the Hausman-McFadden Test By Vijverberg, Wim P.
  2. Households’ WTP for the Reliability of Gas Supply By Wan-Jung Chou; Andrea Bigano; Alistair Hunt; Stephane La Branche; Anil Markandya; Roberta Pierfederici
  3. Paying for Status? - The effect of frequent flier program member status on air fare choice By Nathalie C. McCaughey; Christiaan Behrens

  1. By: Vijverberg, Wim P. (CUNY Graduate Center)
    Abstract: The Independence of Irrelevant Alternatives assumption inherent in multinomial logit models is most frequently tested with a Hausman-McFadden test. As is confirmed by many findings in the literature, this test sometimes produces negative outcomes, in contradiction of its asymptotic χ² distribution. This problem is caused by the use of an improper variance matrix and may lead to an invalid statistical inference even when the test value is positive. With a correct specification of the variance, the sampling distribution for small samples is indeed close to a χ² distribution.
    Keywords: multinomial logit, IIA assumption, Hausman-McFadden test
    JEL: C12 C35
    Date: 2011–06
  2. By: Wan-Jung Chou; Andrea Bigano; Alistair Hunt; Stephane La Branche; Anil Markandya; Roberta Pierfederici
    Abstract: The security of natural gas supply is an important issue for all EU countries due to the region’s heavy dependence on imported supply sources and in light of energy demand for gas that is continuously increasing. Discussions have emphasised strategies for securing the supply at the macro level, e.g. diversification in supply sources, increase in storage capacity, etc. By contrast, consumers’ demand for the reliability of gas supply is rarely investigated. Hence this study was conducted to examine the economic implications associated with the security of gas supply directly to domestic consumers. Based on the choice experiment approach, household surveys were conducted in France, Italy and the UK. The results confirmed that the degree of the economic impact of a disruption of gas supply to domestic consumers was a function of the duration of a supply disruption and the season in which a supply cut would take place, as well as other preferences of consumers. The willingness to pay to secure per unit of gas consumption, or alternatively the costs of gas unsupplied, was estimated at between €2.65/cubic metre and €41.48/cubic metre across three different European countries.
    Keywords: Energy security; gas supply; households; willingness to pay; choice experiment; EU
    Date: 2011–07
  3. By: Nathalie C. McCaughey; Christiaan Behrens
    Abstract: Frequent flier programs (FFPs) are said to affect airline customer behaviour such that revenue of sponsoring airlines increases. To this end prior research relies on assumptions of competition, lock-in effects and variations in scale and scope of FFPs. Whether a FFP by itself induces a price premium remains unanswered. In an effort to shine some light on this question, we apply discrete choice analysis to a new proprietary data set of actual frequent flier member flight behaviour (fares paid, FFP points received) over a 12-months period. We take advantage of the variations in the structure of FFPs (Gold, Silver and Bronze tier levels), to assess both the existence of a FFP price premium and the price premiums average monetary value in US$ per FFP member. Our findings suggest that FFP members are willing to pay a price premium of up to six percent, which is directly attributable to the FFP.
    Keywords: discrete choice analysis, loyalty programs, relationship marketing, price premium, frequent flier program, CRM
    Date: 2011–06

This nep-dcm issue is ©2011 by Philip Yu. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.