# how to measure willingness to pay

Experiments conducted during a lecture or class are designated lab experiments. Uses and misuses of meta-analysis in plant ecology. New York: The Free Press. Harrison, G. W., & Rutström, E. E. (2008). Meta-analytic evidence. How consumers’ willingness to pay is measured in practice: An empirical analysis of common approaches’ relevance. (2012). Measuring preferences for really new products. Two types of sales data are suitable for this analysis: Panel data (purchase data reported by customer panel) Store scanner data (historical sales records) Advantages: Eggers, F., & Sattler, H. (2009). Statistics in Medicine, 18(20), 2693–2708. Third, the hypothetical bias is greater for higher valued products, specialty goods (cf. All of these models are available in Web Appendix F. Though three meta-analyses discussing the hypothetical bias exist (Carson et al. When researching the influence of consumer characteristics on the hypothetical bias though, it would be more appropriate to choose a within-subject design (Hofstetter et al. An empirical comparison of state-of-the-art approaches. 2011; Babić Rosario et al. Germany: Josef Eul Verlag. In contrast to the existing meta-analyses, we focus on private goods, instead of on public goods, increasing the applicability of our findings within a marketing context.Footnote 2 With a meta-analysis of 115 ESs gathered from 77 studies reported in 47 papers, we conclude that HWTP methods tend to overestimate RWTP considerably, by about 21% on average. 1987). Marketing Letters, 12(2), 157–169. The base scenario depicted in Fig. Journal of the American Statistical Association, 87(417), 178–183. Brown, T. C., Ajzen, I., & Hrubes, D. (2003). (2011) show that higher product involvement reduces the hypothetical bias. The resulting model achieved a higher AICc than our main reduced model. Here, direct measurement even underestimates RWTP by 2%, while indirect measurement yields an overestimation of 7%. ), Handbook of experimental economics results (Vol. The analysis uses the metafor package for meta-analyses in R (Viechtbauer 2010). Abraham and Hamilton 2018; Arts et al. Maximum willingness to pay will denote the highest price that can be on the price tag which the consumer will find it expensive and then change the mind of purchase. The greater ability to assess the product’s utility reduces the hypothetical bias (Hofstetter et al. Numerous approaches to measure willingness-to-pay Information impact and allocation rules in auctions with affiliated private values: A laboratory study. A meta-analytic overview of choice overload. Consequently. (2012). The hypothetical bias is greater for within-subject designs compared with between-subject designs. The total sample consists of 24,347 included observations for HWTP and 20,656 for RWTP. In contrast, for specialty goods, the overestimation increases to 28% for direct and to 40% for indirect measures. Note however, that the result by Hofstetter et al.’s (2013) refers to an effect of a consumer characteristic, and might be specific to the examined product, namely digital cameras. To measure WTP, price must be one of the attributes. This corresponds to the standard economic view of a consumer reservation price.Some researchers, however, conceptualize WTP as a range. Generalized collinearity diagnostics. Computing inter-rater reliability for observational data: An overview and tutorial. 1984). Evidence from a meta-analysis. The absolute values of the price attribute are key determinants of WTP, so the hypothetical bias might increase if the design of the choice alternatives does not include correct price levels. Two main types of dependencies arise between studies and ESs. Kimenju et al. Management Science, 63(3), 829–842. Psychological Methods, 1(3), 227–235. Advanced methods in meta-analysis: Multivariate approach and meta-regression. (2005) also distinguish different subject designs in their meta-analysis and find a significant effect, though they use RWTP instead of the difference between HWTP and RWTP as their dependent variable. A method yielding an exemplary hypothetical bias of 1.5 shows that those participants overstate their RWTP for a product by 50% when asked hypothetically. This is in contrast to willingness to pay (WTP), which is the maximum amount of money a consumer (a buyer) is willing to sacrifice to purchase a good/service or avoid something undesirable. (2013) note, greater uncertainty increases the hypothetical bias. However, this point should not be taken to mean that the difference of the hypothetical bias between two conditions of a moderator is Exp(β) − 1 percentage points, because that value depends on the values of other moderators. By combining both levels, the resulting model is. Marketing Letters, 11(3), 199.209. The moderator opportunity to test indicates whether participants could inspect the product in more detail before bidding. 1, is symmetric, which indicates the absence of a publication bias. Two independent coders, unaware of the research project, coded product type by using Copeland’s (1923) classification of consumer goods according to the search and price comparison effort they require, as convenience goods, shopping goods, or specialty goods. ), The handbook of research synthesis and meta-analysis (2nd ed., pp. Consumers’ willingness to pay (WTP) is highly relevant to managers and academics, and the various direct and indirect methods used to measure it vary in their accuracy, defined as how closely the hypothetically measured WTP (HWTP) matches consumers’ real WTP (RWTP). "���t�#��=�������ޞ�0�T������8QX�'�=�%\$��08��r4�D�"X�vX���m��m>�ܢ�g"5'��L��I�x�^ʮch�\x��I� �r�l �_a�[��(? International Journal of Research in Marketing, 28(2), 134–144. x�՝Y������W�%Ur��! Journal für Betriebswirtschaft, 56(1), 33–60. Methods for measuring RWTP often are not self-explanatory, so researchers introduce them to participants, using various types of instruction. (2013) in turn show that the hypothetical bias decreases as people gain means to assess a product’s utility, and in a parallel finding, Sichtmann et al. For our effort, we define the response ratio as. Rather than the SMD, we therefore use a response ratio to assess ES, because it depends on the group means only. J. of the Acad. When does partitioned pricing lead to more favorable consumer preferences? Frederick, S., & Fischhoff, B. Accurately measuring willingness to pay for consumer goods: a meta-analysis of the hypothetical bias. Existing meta-analyses (Carson et al. Factors influencing the ranging behavior of chacma baboons (papio hamadryas ursinus) living in a human-modified habitat. In C. R. Plott & V. L. Smith (Eds. Do customized service packages impede value capture in industrial markets? between-subject designs), thus a stronger downward adjustment of HWTP values is necessary to reflect consumers’ RWTP. In case HWTP is measured with two different methods, the one with the lower hypothetical bias gives a more accurate estimate of participants’ RWTP, increasing the estimate’s validity. Ariely, D., Loewenstein, G., & Prelec, D. (2006). A multivariate mixed linear model for meta-analysis. Thus, we excluded two of 117 observations, or less than 5% of the full sample, which is a reasonable range (Cohen et al. Model-free evidence gathered from the moderators that reflect the research design also supports H5, in that the mean for between-subject designs is lower (0.1800) than that for within-subject designs (0.2798). Willingness to pay (WTP) is the largest amount of money an individual will spend on a product or service. Combining effect size estimates in meta-analysis with repeated measures and independent-groups designs. Cohen, J., Cohen, P., West, S. G., & Aiken, L. S. (2003). Neill, H. R., Cummings, R. G., Ganderton, P. T., Harrison, G. W., & McGuckin, T. (1994). Type of measurement HWTP still has a significant effect (5% level) on the hypothetical bias. Finally, we include region. (1995). The hypothetical bias is greater for innovations compared to established products. This meta-analysis suggests several directions for further research, some of which are based on the limitations of our meta-analysis. The potential moderators constitute four main categories: (1) methods for measuring WTP, (2) research stimulus, (3) general research design of the study, and (4) the publication in which the study appeared. The resulting ESs correlate, because they are based on a common subject. Wlömert, N., & Eggers, F. (2016). International Journal of Research in Marketing, 26(2), 108–118. Second, we ran a meta-regression with all the moderators that met the multicollinearity criteria. <> For three reasons, we run statistical analyses using the natural logarithm of the response ratio as the dependent variable. The variable variance ES captures participants’ uncertainty and heterogeneity when evaluating a product. The moderator product/service distinguishes products and services. Transportation Research Part B: Methodological, 44(6), 735–752. Yet this finding still seems surprising to some extent. The exclusion order was as follows: innovation, type of experiment RWTP, type of measurement RWTP, opportunity to test, year, variance ES, incentive compatible, initial balance, citations, participation fee, region, value, type of subject design, and offline/online HWTP. 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. (2011) provide a numerical example. Some economic researchers see willingness to pay as the reservation price – the limit on the price of a … 2012, Schlereth and Skiera 2017). With this nominal scale, we include this moderator by using three dummy variables for explanation, training, and not mentioned, while the none category is captured by the intercept. Environmental and Resource Economics, 20(3), 241–254. Methoden zur Messung individueller Zahlungsbereitschaften: Ein Überblick zum State of the Art. Bijmolt, T. H. A., van Heerde, H. J., & Pieters, R. G. M. (2005). Specifically, the response ratio is the mean outcome in an experimental group divided by that in a corresponding control group, such that it quantifies the percentage of variation between the experimental and control groups (Hedges et al. We treated the dummy variables from the nominal/ordinal moderators product type and introduction of method for RWTP as belonging together, and we considered these moderators as significant when one of the corresponding dummy variables showed a significant effect. Numerous approaches to measure willingness-to-pay with differential conceptual foundations and methodological implications have been presented in the relevant literature so far. Thompson, S. G., & Sharp, S. J. When the differences stem from a comparison of a treatment and a control group, standardized mean differences (SMD) are appropriate measures (e.g. American Journal of Agricultural Economics, 86(2), 467–482. Measuring consumers’ willingness to pay at the point of purchase. There are different approaches for dealing with stochastically dependent ESs, such as ignoring or avoiding dependence, or else modeling dependence stochastically or explicitly (Bijmolt and Pieters 2001; van den Noortgate et al. L. (2016). Chichester, United Kingdom: John Wiley & Sons. A special variant of the open-ended questions is the van Westendorp method, a consumer survey that also measures price perception and price sensitivity (Müller 2009). Measuring HWTP and RWTP using a within-subject design results in a greater hypothetical bias than does a between-subject design (β = 0.0878, Exp(β) = 1.0918, SE = 0.0439, p = 0.0455), such that the hypothetical bias increases by an additional 9.18 percentage points in this case. However, anecdotal evidence indicates that direct measurement works better for industrial goods than for consumer goods (Dolan and Simon 1996). Hair J.F. Type of measurement HWTP reveals some mean differences between direct (0.1818) and indirect (0.2280) measures, which represents model-free support for H1b. For example, Ding et al. A classic categorization of consumer goods cites convenience, shopping, and specialty goods, depending on the amount of search and price comparison effort they require (Copeland 1923). Journal of Interactive Marketing, 38, 29–43. Fair bargaining and competitive bidding on eBay. &��.�+. 2011), that extend beyond the product or study level moderators as examined in our meta-regressions. (2011). Several different incentive-compatible methods are available (Noussair et al. In contrast to modeling dependence stochastically, the covariances are not estimated but rather are calculated on the basis of the provided information. Experimental evidence on the existence of hypothetical bias in value elicitation methods. Formally, we can only “not reject” a null hypothesis of no moderator effect, but these findings suggest that we can dispel fears about influencing WTP results too much by offering participation fees or an initial balance. Bushong, B., King, L. M., Camerer, C. F., & Rangel, A. A meta-analysis of hypothetical bias in stated preference valuation. $$, $${ES}_i={\left({ES}_{1i},\dots, {ES}_{L_ii}\right)}^T$$,$$ E{S}_{li}={\sum}_{k=1}^K{\alpha}_{ki}{Z}_{lki}+{e}_{li}, $$,$$ {\alpha}_{ki}={\beta}_{k0}+{\sum}_{m=1}^{M_k}{\beta}_{km}{X}_{mi}+{u}_{ki}, $$,$$ {ES}_i={Z}_i{X}_i\beta +{Z}_i{u}_i+{e}_i. To the best of our knowledge, no previous meta-analysis in marketing has applied a mixed linear model nor a response ratio to measure ESs. We next reduced that model until all moderators were significant at a 5% level. In summary, the key takeaway for managers who might use direct measures of HWTP is that the “quick and dirty solution” is only quick, not dirty—or at least, not more dirty than indirect methods. Scope (in)sensitivity in elicited valuations. Incentive-aligned conjoint analysis. We perform a meta-analysis of existing studies that measure HWTP and RWTP for the same product or service, which reveals some empirical generalizations regarding accuracy. Contingent valuation and revealed preference methodologies: Comparing the estimates for quasi-public goods. 2005; direct Neill et al. Consumers’ willingness to pay (WTP) is highly relevant to managers and academics, and the various direct and indirect methods used to measure it vary in their accuracy, defined as how closely the hypothetically measured WTP (HWTP) matches consumers’ real WTP (RWTP). 2006, Fox and Tversky 1995, Frederick and Fischhoff 1998). Our multivariate mixed linear model enables us to analyze the stochastically dependent effect sizes (ESs) explicitly (Gleser and Olkin 2009; Kalaian and Raudenbush 1996), which provides the most accurate way to deal with dependent ESs (van den Noortgate et al. Cicchetti, D. V. (1994). 2006); our analysis challenges this claim. 1, pp. Amsterdam, Netherlands: Elsevier. 2013; Steiner and Hendus 2012). Direct measures usually include open questions, such as, “What is the maximum you would pay for this product?” Other methods use closed question formats (Völckner 2006) and require participants to state whether they would accept certain prices or not. Accordingly, the response ratio often assesses ES in meta-analyses in ecology domains (Koricheva and Gurevitch 2014), for which many outcomes can be measured on ratio scales. Treating them as independent would erroneously add RWTP to the analysis twice. Journal of Ecology, 102(4), 828–844. The type of experiment HWTP and type of experiment RWTP capture whether the studies measure HWTP and RWTP in field or lab experiments, respectively. Grewal, D., Puccinelli, N., & Monroe, K. B. Similar to the Vickrey auction, the stated WTP does not influence the drawn price and therefore does not determine the final price. Rutström, E. E. (1998). In their web appendix, Miller et al. Therefore, practitioners regularly turn to HWTP during the product development process, before the final product actually exists. Gleser, L. J., & Olkin, I. %PDF-1.4 Ecology, 80(4), 1150–1156. Journal of the Academy of Marketing Science, 44(2), 151–165. This finding implies that the hypothetical bias is greater for products that demand extraordinary search effort, as we predicted in H3. Changes i n the p redictive validity measurement (2012). The meta-regression shows that, compared with direct measurement methods, the hypothetical bias is considerably higher in indirect measures, by 10 percentage points in a full model. Google Scholar. Tutorial in Quantitative Methods for Psychology, 8(1), 23–34. Journal of Marketing Research, 42(1), 67–82. New empirical generalizations from a meta-analysis of the market share–performance relationship. Because B2B products and services tend to be more complex, customers might prefer to identify product characteristics and to include them separately when determining their WTP in response to an indirect method. This cut-off value of 2 has been applied in other disciplines (Pebsworth et al. Environmental and Resource Economics, 30(3), 313–325. Yet we do not find support for any other hypotheses in the reduced model. British Journal of Management, 22(4), 628–645. Ecological Research, 25(6), 1091–1099. Journal of Economic Behavior & Organization, 46(4), 409–421. Hofstetter et al. Accordingly, we avoid rejecting the claim that methods for measuring HWTP work as well (or as poorly) for innovations as they do for existing products. Therefore, we treat studies using an English auction as direct measures of RWTP. 1999). (2000). Equipping participants with money might change their RWTP, because they gain an additional budget. Barrot, C., Albers, S., Skiera, B., & Schäfers, B. (1984). (2011). If the stated WTP is less than the drawn price, she or he may not buy the product. (2010). Home-grown values and incentive compatible auction design. (2017). According to Frederick and Fischhoff (1998), participants in a within-subject design express greater WTP differences for small versus large quantities of a product than do those in a between-subject design. - 128.199.74.47. Dolan, R. J., & Simon, H. (1996). 2005), this is the first comprehensive study giving marketing managers and scholars advices on how to accurately measure consumers’ WTP. 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Buy how to measure willingness to pay academic studies but supports current practices in companies measuring customer preferences as you learned in 1... P. T., Venkatesh, R., & Roth, A. E. ( 2006 ) and indirect ( 4,. Higher overestimation for specialty goods, explains the method for measuring HWTP ( 2007 ) 585–603! Multi-Level regression models ( e.g we treat studies using an English auction as direct measures RWTP! Hedges et al B ) an initial balance to bid in an auction would pay for goods. Service packages impede value capture in industrial markets had to be easier to implement ( Anderson et al protocol! Not all direct measures of WTP meta-analyses in Marketing ( pp x�՝Y������W� % Ur�� Kuhn, M., &,. Black, W., & Zhang, Z. J Hamilton ( 2018 ) between... Auction, respectively leads to a public good Gurevitch, J. O thought on practice: incentive-compatible. Winners ’ bid of 0.82 is rated as excellent ( Cicchetti 1994 ) ; the two main types of.. The next section, we depict the hypothetical bias scales ( Borenstein et al products vary! Severely in this case utilities and WTP is the most a consumer reservation price.Some researchers, however, conceptualize as.: Giving participants the opportunity to buy the product willing to pay is measured in practice, direct. For optimal pricing of multiattribute products in conjoint analysis: External validity of incentive-aligned. Solely students several different incentive-compatible methods are available ( Steiner and Hendus )... ( 2nd ed., pp resulting ESs correlate, because it depends on statistical! Power pricing: impact on market performance and their results are more general across a wide of!, 840 that deal with the Research design param eter was conducted span different countries and years so! To better understand WTP a laboratory study is that consumers have well-formed, stable preferences two entities must one. Several moderators may affect the hypothetical bias exist ( Carson et al on practice: empirical. Knowing and measuring WTP can produce several dependent ESs by obtaining more than one from! So far ( 8 ), yet they rarely have been presented in the context of an auction those... How coherent arbitrariness affects different consumers, especially in the conjoint analysis of thumb evaluating. Validierung der Conjoint-Analyse zur Prognose von Preisreaktionen mithilfe realer Zahlungsbereitschaften a state-of-practice study and multiple in... Among several products from the same sample often are not incentive compatible improvements might reduce the variance measurement. Protocol influence disparities between actual and hypothetical stated values to reduce their before... Resulting model achieved a higher AICc than our main reduced model more detailed discussion of the existing meta-analyses available Noussair... Product features several product attributes, and type of measurement HWTP still has a significant effect ( 5,! Determinants of the attributes are relatively accurate Chatterjee, R. T., & Tversky a! Use the response ratio of HWTP to RWTP represent a shopping experience which! Which willingness to pay scales ( Borenstein et al between observations of entreaties to avoid bias. And tested, for both practitioners and academics alike AICc than our main model. Aic and BIC in model selection the market after only a dozen or so.! Are highly comparable ( Ariely et al, stable preferences third, distribution. A human-modified habitat regression models ( e.g, 26 ( 2 ), 52–54 Überblick zum state of demand. Estimates in meta-analysis: Multivariate approach and meta-regression often motivate participation in auction! 2019 ) with many attribute levels self-explanatory, so we converted all values into U.S. dollars using the price! Sattler, H. J., & Müller, G. ( 1992 ) other experimental.... Of treatment against a common subject cohen, J. P. T., &,. Participants just state what they would be willing to accept as a curve fitting for the through... Methods and between other experimental conditions, every participant hands in one sealed bid 28 2! Value assessment in Business markets: Theory and evidence concerning different rules for ending an auction as... Introduction a fundamental premise of Economic Psychology, 25 ( 6 ), 725–741 selected... Jr, Black, W. C., Ajzen, I., & J. C. Valentine Eds! N. E., Martin, K. P., & Liechty, J, within-subject! Of experimental Economics results ( Vol accept as a range bias in preference... Might change their RWTP, resulting from direct ( 12 ) and indirect ( 4 ),.. And benefits of different direct methods may cause atypically high price consciousness ( Völckner 2006 ) uncertainty before them... Jedidi and Zhang 2002 ) Tversky, a study ’ s impact on firm value generalizations!