Abstract
In this paper we are concerned with modeling consumer choice among competing products when spatial location matters to consumers as a product attribute. We review the literature on hospital choice and find many older studies using inappropriate ‘independence of irrelevant alternatives’ (IIA) models, while more recent studies exploit increasingly more sophisticated modeling which affects what we call here ‘dependence of relevant alternatives’ (DRA) formulations. Models which embody the IIA property to estimate probabilities of choice among alternatives do not allow the relative values of choice probabilities to change when new choices become available, which is unrealistic because new choices change substitution patterns among available products. Parameters from IIA models are thus not useful to assess the value to consumers of changes in available products, which has considerable importance to public policy. We show that tractable DRA models exist for situations where location matters, and hope that in explicitly comparing some IIA and DRA models, the value of a spatial approach to consumer choice problems will be highlighted and embraced more broadly in future spatial science and health policy research.
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Notes
- 1.
If an individual evaluates all alternatives, this is a conditional logit model; if an individual processes information hierarchically and choice set membership is known, this is a nested logit model.
- 2.
It can also reflect the degree of substitutability among competing alternatives (Borgers and Timmermans 1987) when the parameter is allowed to vary across k attributes (θk). In this case, if the sum of the parameters θk is zero, then there is no product substitution, and the competing destinations model reduces to the conditional logit model.
- 3.
The test compares estimated parameters and covariance matrices from the full choice set (conditional logit model) with the restricted choice set (nested logit model). The test can fail for reasons besides IIA and can yield a negative test statistic (Burns and Wholey 1992, p. 49, footnote 5).
- 4.
The robustness stems from the fact that the concentration measure is based only on the observable, exogenous characteristics of patients and hospitals – which is a significant improvement over endogenous measures based on shares of revenues or admissions.
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Mobley, L.R., Bazzoli, G.J. (2016). Modeling ‘Dependence of Relevant Alternatives’ in Consumer Choice: A Synthesis from Disparate Literatures. In: Howell, F., Porter, J., Matthews, S. (eds) Recapturing Space: New Middle-Range Theory in Spatial Demography. Spatial Demography Book Series, vol 1. Springer, Cham. https://doi.org/10.1007/978-3-319-22810-5_7
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