Mogens Fosgerau,Technical University of Denmark
"Flexible entropy and the benefit from diversity"
Abstract
We formulate direct utility functions for the consumption of varieties of a differentiated good, basing first the benefit from variety on two existing generalizations of the Shannon entropy. Next we develop a class of utility functions based on a new generalization of the Shannon entropy, which we call flexible entropy.
It can be used to create arbitrarily complex substitution patterns in a controlled fashion and any additive random utility discrete choice model has a representative consumer counterpart. The benefit from diversity attains maximum when the surpluses associated with the differentiated good are equal.
Contact person:Johan Lagerlöf