Chapter 3 Flashcards
Methods to measure WTP and Demand
Market Data
Advantages :
- usually larger scale data available
- collection possible in case experiments are not feasible
- determination of individual willingness-to-pay possible
- can be used for one-to-one pricing
Limitations :
- No systematical variation
- No controlled environment
- Causal effects harder to estimate, but possible
Opportunities
- Identify demand curve
- identify price elasticity
- Determine revenue and profit max price
- conduct what if analysis
- Security calculus for management decisions
- revealed preference data
Field Research
Prices are varied in real buying situations and the impact on sales volume is tested
advantage :
- Natural environment
- Observation of everyday-behavior is possible
disadvantage :
- low control for disturbances
- experimental manipulation is possibly difficult to implement
Lab Research
Purchase situations are mirrored in the lab as realistic as possible. Prices are varied in different experimental groups.
Impact on sales is measured
advantage
- Relatively cheap
- Great control over experimental manipulations and disturbances
disadvantage
- often rather artificial purchase situations
- low external validity
Field experiment - store test
** advantages
- close-to-market results
- natural buying behaviour is observed
** disadvantaged
- No representative sample
- Possible overstating of results due to ideal shelf-care and therefore avoidance of out-ofstock-situations
- Control for several variables and control variables is difficult (e.g. advertising-actions of competitive products)
- Relatively large consumption of resources (Staff, Logistics, Recruiting of retails for sample)
- Long test-duration
English Auction
- Ascending bid auction
- Not incentive -compatible
- procedure :
- Bids are publically announced (open auction)
- No limits for counterbidding, little by little raising of bids by bidders
- Auction ends if no higher bids are placed
- Highest bidder gets the item
- The price equals the highest bid
Dutch Auction
** Descending bid auction
** Not incentive-compatible
- Procedure :
- Bids are publically announced( open auction)
- The auctioneer starts the auction with a high starting price, which he/she lowers successively
- The auction ends, as soon as a bidder accepts a price
- This bidder gets the good at the accepted price
maximum-bid auction
** First price sealed bid auction
** Not incentive- compatible
** Procedure :
Bids are placed secretly (closed auction)
Bidders place only one offer
The auction ends after a specified period of time
The highest bidder gets the good
The price equals the highest bid
Vickrey Auction
** second price sealed bid auction
**Incentive - compatibile :
-Optimum bidding strategy :
Under a Vickrey-Auction the optimum bidding strategy is to bid one’s own product valuation ( i.e. the maximum WTP for a product)
Otherwise having to purchase at a loss becomes more likely or being able to purchase at a gain becomes less likely
** Procedure :
Bids are placed secretly (closed auction)
Bidders place only one offer
The auction ends after a specified period of time
The highest bidder gets the good
The price equals the second-highest bid
- dis/advantages of Auctions
** Advantages
- identification of individual price possible
- low cost
- valid too to measure price effects
- incentive-aligned Vickrey-Auction can identify true WTP
** Disadvantages
- Strategic thinking may influence bidding behavior
- rise appetite influences bidding behavior
- possible after-bid dissonance of bidders( especially english and dutch auction)
Experts-/Subjective estimations
Advantages
Low cost
Easy and user-friendly
The survey approach helps, to structure problems and push back emotions
Competitive situations may be anticipated
Disadvantages
The quality of results depends on the quality of experts‘ estimates (threat of wrong assumptions, wishful thinking).
Estimates come from “internal” experts, not from customers
Individual estimates sometimes deviate by factor one to 10-20
Direct Customer Surverys
- Advantages*
- Goal-oriented query of single data
- Easy and user-friendly
- Estimates from customers
- Higher validity for industry goods than for consumer goods
- Disadvantages*
- Price is investigated in isolated fashion, while the customer in reality trades off aspects of utility and price -> „atypical„ high effects of price
- Threat of discrepancy between verbal statements and actual behavior
- > Use incentive-aligned methods whenever possible.
Gabor-Granger-Method
** Asking for likelihood of actual purchase of a product at a certain price
** Builds a relationship between likelihood of purchase and price
Advantages
Identification of possible price barriers
Easy to implement
Low cost
Disadvantages
Does not measure WTP
Competitive situation is not taken into account
Does not provide information about price elasticity, hence, no simulation-opportunity‘s (e.g.identification of max. revenue price)
Artificial focus on price
Van Westendorp Method
Advantages
Provides insights into consumer reaction to price.
Useful in the following situations:
For innovative products, for which no price knowledge exists
For products without competitive environment
Affordable
Easy to implement
Useful for determination of price barriers
Delivers information about penetration and indifference prices
Disadvantages
Not a measure of WTP
Competitive situation is not taken into account
Sales volume related to price can not be quantified. Therefore concrete determination of sales- or contribution margin-maximizing prices is impossible
Strong focus on price may lead to overestimation of price or strategic response-behavior
Validity problems in dynamic environment
Choice based conjoint (indirect Customer Surverys)
** Advantage
- choice is more realistic than ranking/rating
- Realistic product-description
- Low number of judgments needed
**Disadvantage
- Increasing complexity with increasing number of attributes
- Relatively high time requirements
four choice rules for market simulation in conjoint analysis
- Maximum utility rule
Customer chooses product with highest utility
- Share of Utility rule
Under this choice rule, the consumer selects each product with a probability that is proportional to the utility of the product compared to the total utility derived from all the products in the choice set
- Logit choice rule
similar to share of utility rule, expect that it puts larger weights to more preferred alternatives and smaller weights to less preferred alternatives
- Alpha rule
Modified version of share of utility rule
Before applying the share of utility, the utility functions are modified by an alpha factor so that the market shares of existing products are as close as possible to their actual market shares
Why does Incentive-Compatibility induce TruthTelling in Direct and Indirect Surveys to Measure WTP?
** Purchase offer / bid (= willingness-to-pay) has no direct influence on price to be paid.
** Highest possible price to be paid for the product is equal to the participant’s maximum offer (and therefore, willingness-to-pay)
** Requirement: Consumer must have understood the mechanism