Working Paper: NBER ID: w23535
Authors: Daniel McFadden
Abstract: A common problem in applied economics is to determine the impact on consumers of changes in prices and attributes of marketed products as a consequence of policy changes. Examples are prospective regulation of product safety and reliability, or retrospective compensation for harm from defective products or misrepresentation of product features. This paper reexamines the foundations of welfare analysis for these applications. We consider discrete product choice, and develop practical formulas that apply when discrete product demands are characterized by mixed multinomial logit models and policy changes affect hedonic attributes of products in addition to price. We show that for applications that are retrospective, or are prospective but compensating transfers are hypothetical rather than fulfilled, a Market Compensating Equivalent measure that updates Marshallian consumer surplus is more appropriate than Hicksian compensating or equivalent variations. We identify the welfare questions that can be answered in the presence of partial observability on the preferences of individual consumers. We examine the welfare calculus when the experienced-utility of consumers differs from the decision-utility that determines market demands, as the result of resolution of contingencies regarding attributes of products and interactions with consumer needs, or as the result of inconsistencies in tastes and incomplete optimizing behavior. We conclude with an illustrative application that calculates the welfare impacts of unauthorized sharing of consumer information by video streaming services.
Keywords: No keywords provided
JEL Codes: D11; D12; D60; D61; K13; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in prices and product attributes due to policy interventions (L11) | Consumer welfare (D69) |
| Market compensating equivalent (MCE) (J30) | Consumer welfare (D69) |
| MCE captures the welfare impacts more accurately when decision utility does not align with experienced utility (D11) | Consumer welfare (D69) |
| MCE can be effectively calculated using indirect utility functions derived from mixed multinomial logit models (D11) | Assessment of welfare changes (D69) |
| MCE aligns with traditional measures of consumer surplus under conditions of constant marginal utility (D11) | Validity as a welfare measure (I38) |
| Unauthorized sharing of consumer information by video streaming services (D16) | Welfare impacts (D69) |