Willingness To Pay

Question 1

Benefits of measuring demand (2)

Answer 1

Informs pricing policy e.g finding profit maximisation

Use to address other economic questions e.g role of credit if reason for low demand is credit constrained!

Question 2

Issue with simply asking peoples WTP

Answer 2

Don’t want to reveal true preferences as want as cheap as possible

Question 3

Becker-Degroot-Marshcak (BDM) mechanism

Answer 3

Consumer bids b
Random price is p

If p>b , customer cannot buy
If p<=b, customer buys at p

Question 4

So what is the dominant strategy in this?

Answer 4

TO TELL THE TRUTH! Since even if b>p, only have to pay p. So might as well just give their actual WTP so they do not lose out!

Set b*=v (v=WTP)

Question 5

Berry: WTP on water filters

Answer 5

Conditional on same WTP - RANDOM PRICES STILL

Conditional on same WTP - random allocation

(So if same WTP, price you pay is random, and whether you even get it is random)

Question 6

How to see sunk cost effect (effect of price paid) on usage

Answer 6

Compare those with same WTP (V) but paid different prices. SEE INCENTIVE EFFECT!

Question 7

How to see screening effect: if those with highest V use the most

Answer 7

Compare high WTP vs low WTP but paid same price!
(Removes incentive effect and leaves selection effect since same price!

Question 8

How to see heterogenous treatment effects: are those who benefit the most also those who having the highest WTP?

Answer 8

Look at treatment effects for different v’s. To see how benefit varies at different willingness to pay

Question 9

Findings:

Answer 9

No sunk cost effect = with same WTP but different prices, usage is the same

Usage is higher at higher WTP at same prices =screening effect

Heterogenous treatment effects by WTP - negative effect -those with a low WTP meant didn’t get the benefits (didn’t value it)