Using discrete choice experiments to estimate willingness-to-pay intervals

Publisher:
Springer
Publication Type:
Journal Article
Citation:
Marketing Letters, 2012, 23 pp. 761 - 776
Issue Date:
2012-01
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Willingness-to-pay has always been conceptualized as a point estimate, frequently as the price that makes the consumer indifferent between buying and not buying the product. In contrast, this article estimates willingness-to-pay (WTP) as an interval based on discrete choice experiments and a scale-adjusted latent-class model. The middle value of this interval corresponds to the traditional WTP point estimate and depends on the deterministic utility; the range of the interval depends on price sensitivity and the utility's error variance (scale). With this conceptualization of WTP, we propose a new measure, the attractiveness index, which serves to identify attractive consumers by combining knowledge about their price sensitivities and error variances. An empirical study demonstrates that the attractiveness index identifies the most attractive consumers, who do not necessarily have the largest WTP point estimates. Furthermore, consumers with comparable preferences can differ in their purchase probability by an average of 16%, as reflected in differences in their WTP intervals, which yields implications for more customized target marketing.
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