Just-noticeable difference as a behavioural foundation of the critical cost-efficiency

Apr 2018 | 848

Authors: Pawel Dziewulski


Abstract

Critical cost-efficiency index (or CCEI), proposed in Afriat (1972, 1973) and Varian (1990), is the most commonly used measure of revealed preference violations. By representing consumer preference with interval orders, as in Fishburn (1970), we show that this index is equivalent to a particular notion of the just-noticeable difference, i.e., a measure of dissimilarity between alternatives that is sufficient for the agent to tell them apart. Therefore, CCEI can be interpreted as the consumer's cognitive inability to discriminate among options. This characterisation sheds new light on the existing empirical findings.

JEL Codes: C14, C60, C61, D11, D12

Keywords: utility maximisation, generalised axiom of revealed preference, critical cost-efficiency index, interval order, just-noticeable difference


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