Faculty of Economics and Business Administration Publications Database

How Should Consumers' Willingness to Pay Be Measured? An Empirical Comparison of State-of-the-Art Approaches

Selected
Authors:
Hofstetter, Reto
Krohmer, Harley
Zhang, John Zhong
Source:
Volume: 48
Number: 1
Pages: 172 - 184
Month: February
ISSN-Print: 0022-2437
Link External Source: Online Version
Year: 2011
Keywords: Market research; Pricing; Demand estimation; Willingness to pay; hypothetical bias
Abstract:

This study compares the performance of four commonly used approaches to measure consumers' willingness to pay with real purchase data (REAL): the open-ended (OE) question format; choice-based conjoint (CBC) analysis; Becker, DeGroot, and Marschak's (BDM) incentive-compatible mechanism; and incentive-aligned choice-based conjoint (ICBC) analysis. With this five-in-one approach, the authors test the relative strengths of the four measurement methods, using REAL as the benchmark, on the basis of statistical criteria and decision-relevant metrics. The results indicate that the BDM and ICBC approaches can pass statistical and decision-oriented tests. The authors find that respondents are more price sensitive in incentive-aligned settings than in non-incentive-aligned settings and the REAL setting. Furthermore, they find a large number of “none” choices under ICBC than under hypothetical conjoint analysis. This study uncovers an intriguing possibility: Even when the OE format and CBC analysis generate hypothetical bias, they may still lead to the right demand curves and right pricing decisions.

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