Alternative nested logit models: a response to comments by Andrew Daly on an earlier paper of Frank Koppelman and Chieh-hua Wen

This paper reviews and refutes three criticisms by Daly of earlier papers b y Koppelman. and Wen (1998a. and b). The original papers identified importa nt differences between two forms of the nested logit model. These differenc es between the Utility Maximizing Nested Logit (UMNL) and the Non-Normalize d Nested Logit (NNNL) lead to important differences in model estimation, in terpretation and prediction. We reaffirm the position that the NNNL model i s not consistent with utility maximization unless normalized as recommended by Koppelman and Wen and challenge Daly's criticism of the earlier papers. First, Daly's hypothesis of the existence of an alternative behavioral the ory, while correct in principle, is irrelevant to the question at hand, sel ection of a preferred model form, in the absence of an explicit theory. Sec ond, the equivalence of the two models under special circumstances is consi stent with Koppelman and Wen's recommendation for normalization of the NNNL model. Third, the argument that the NNNL has the advantage that it can est imate models which combine data from different sources is not correct as bo th model structures can estimate such models. Thus, we maintain the conclus ion that the NNNL and UMNL models are distinct and the UMNL is preferred be cause of its consistency with established theories of behavior and social w elfare. (C) 2001 Elsevier Science Ltd. All rights reserved.