Stochastic preference modeling within a switching regression framework

The multinominal logit framework is extended by allowing the deterministic utility to be a switching function of the explanatory variable. This can be regarded as a piecewise linear approximation to the unknown specification of the deterministic utility or as a model to incorporate the threshold effect into the consumer behavior. A new estimation procedure is proposed to estimate the utility parameters and the threshold points simultaneously. This new procedure can be formulated as a linear integer programming model solvable by the standard mathematical programming package and the resulting estimates are maximum likelihood estimates. The proposed framework can be applied to the modeling and the estimation of reservation price and reference price.