<p>1muflon1 is right. According to your link, the author meant to use the willingness-to-pay to represent the utility gain from transaction, net of price. See the last several lines of p.38 of Train (2003) for a reference:</p>
<blockquote>
<p>... then the utility of each heating system can be written as <span class="math-container">$U_g = \beta_1 PP_g + \beta_2 OC_g + \epsilon_g$</span>, ... <span class="math-container">$PP$</span> and <span class="math-container">$OC$</span> are the purchase price and operating cost... we expect utility to drop as purchase price or operating cost rises (with all else held constant): <span class="math-container">$\beta_1&lt;0, \beta_2 &lt; 0$</span>.</p>
</blockquote>
<p>In fact, this usage is very common in the line of McFadden and the current empirical IO literature. People tend to interpret <span class="math-container">$U$</span> in the logit model as the <strong>indirect utility function</strong> <span class="math-container">$v(p,\overline{m})$</span>, so that the change of consumer surplus is simply the difference between the indirect utility under two situations. You can refer to, e.g., <a href="https://www.its.caltech.edu/%7Emshum/gradio/papers/Berry1994.pdf" rel="nofollow noreferrer">Barry (1994)</a> for an application.</p>

CC BY-SA 4.0
2024-07-17T01:43:13.827Z
2024-07-17T01:43:13.827Z
DiZ
<p>Since you do not link to the article and there are multiple 2003 articles that have Train as a coauthor, is difficult to say what the context is there.</p>
<p>The definition can still be consistent. For example, people experience disutility when they loose money. Hence, the authors might be simply saying the consumer surplus is the dollar term net utility gain from transaction which would be equivalent to willingness-to-pay minus actual payment.</p>

CC BY-SA 4.0
2022-10-09T12:28:07.620Z
2022-10-09T12:28:07.620Z
1muflon1
<p>In Logit model, as Train(2003) said in his <a href="https://eml.berkeley.edu/books/choice2.html" rel="nofollow noreferrer">book(page 55)</a> said,</p>
<blockquote>
<p>&quot;By
definition, a person’s consumer surplus is the utility, in dollar terms,
that the person receives in the choice situation. The decision-maker
chooses the alternative that provides the greatest utility&quot;</p>
</blockquote>
<p>As to say, the consumer surplus equals to willingness-to-pay in Logit model. However, according defination, consumer surplus equals to willingness-to-pay minus actural payment, so I wonder why don't minus actural payment while calculating consumer surplus in Logit model.</p>

<microeconomics><econometrics><mathematical-economics><choice-theory>
Consumer surplus in Logit model should minus actural payment?
S.X
# Consumer surplus in Logit model should minus actural payment?

(Asked by: username_0 on 2022-10-09)

In Logit model, as Train(2003) said in his [book(page 55)](https://eml.berkeley.edu/books/choice2.html) said,

> "By
> definition, a person’s consumer surplus is the utility, in dollar terms,
> that the person receives in the choice situation. The decision-maker
> chooses the alternative that provides the greatest utility"

As to say, the consumer surplus equals to willingness-to-pay in Logit model. However, according defination, consumer surplus equals to willingness-to-pay minus actural payment, so I wonder why don't minus actural payment while calculating consumer surplus in Logit model.

**Tags:** microeconomics, econometrics, mathematical-economics, choice-theory


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## 2 answers

### Answer by username_1 on 2024-07-17. Score: 1

username_2 is right. According to your link, the author meant to use the willingness-to-pay to represent the utility gain from transaction, net of price. See the last several lines of p.38 of Train (2003) for a reference:

> ... then the utility of each heating system can be written as $U\_g = \beta\_1 PP\_g + \beta\_2 OC\_g + \epsilon\_g$, ... $PP$ and $OC$ are the purchase price and operating cost... we expect utility to drop as purchase price or operating cost rises (with all else held constant): $\beta\_1<0, \beta\_2 < 0$.

In fact, this usage is very common in the line of McFadden and the current empirical IO literature. People tend to interpret $U$ in the logit model as the **indirect utility function** $v(p,\overline{m})$, so that the change of consumer surplus is simply the difference between the indirect utility under two situations. You can refer to, e.g., [Barry (1994)](https://www.its.caltech.edu/%7Emshum/gradio/papers/Berry1994.pdf) for an application.


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### Answer by username_2 on 2022-10-09. Score: 0

Since you do not link to the article and there are multiple 2003 articles that have Train as a coauthor, is difficult to say what the context is there.

The definition can still be consistent. For example, people experience disutility when they loose money. Hence, the authors might be simply saying the consumer surplus is the dollar term net utility gain from transaction which would be equivalent to willingness-to-pay minus actual payment.


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