EI.SEVIER Economics Letters 49 (1995) 91-94 economics letters Utility maximization in models of discrete choice Martin Peitz Wirtschaftstheoretische Abteilung H, Bonn University, Adenauerallee 24-42, 53113 Bonn, Germany Received 7 September 1994; accepted 8 November 1994 Abstract In this paper I construct a direct utility function that has as its counterpart an indirect utility function that is commonly used in models of product differentiation. Keywords: Utility maximization; Discrete choice JEL classification: L10 1. Introduction In various common models of discrete choice it is assumed that consumers either choose one variant of a good of which they consume one unit and none of the other variants, or they choose the outside option. Articles analyzing this class of models usually commence with an evaluation function, which is called a conditional indirect utility function. A consumer chooses the variant with the highest value: if for some variant the value is positive, a consumer buys one unit of the variant that gives him the maximal value. Otherwise, he chooses the outside option. Duality theory suggests that there is an associated direct utility function. However, the results of duality theory cannot be applied to this problem because continuity is not satisfied. Therefore, there are some doubts as to whether the evaluation function is, indeed, an indirect utility function and whether it is consistent with utility maximization. I will construct a direct utility function such that the underlying preference relation satisfies reflexivity, transitivity, completeness, and local nonsatiation. I will then show that this direct utility function has as its counterpart the indirect utility function I was looking for. Hence, consumer behavior in discrete choice models of the type presented can be derived from utility maximization. 0165-1765/95/$09.50 (~) 1995 Elsevier Science B.V. All rights reserved SSD1 0165-1765(95)00665-6