The IPS Property
Executive Summary — This paper is about discrete-choice and econometric models. The "invariant proportion of substitution," or IPS, property comes into play when, for example, a consumer faces a choice among three laptop computers with slightly different attributes. How will improvements to one laptop's attributes affect how the consumer chooses to substitute one alternative for another? Steenburgh looked at probabilities based on assumptions about consumers' utility-maximizing behavior. Key concepts include:
- The IPS property can be interpreted as an implicit assumption that is made to attain parsimony at the expense of flexibility.
- Idiosyncratic variation in the consumer's taste parameters can eliminate the IPS restriction.
This article introduces the invariant proportion of substitution (IPS) property. The IPS property holds when the proportion of demand that is created by substitution away from a competing alternative is the same regardless of which of the enhanced good's attributes is improved. Since this property arises from assumption about the representative utility rather than the assumptions about the unobserved component of utility, models that break the independence of irrelevant alternatives (IIA) property, such as the nested logit and probit models, do not necessarily also break the IPS property. Some models that do break the IPS property are discussed. Keywords: Discrete-Choice Models, Econometric Models
- Full Working Paper Text
- Working Paper Publication Date: August 2004
- HBS Working Paper Number: 05-022