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