EXPRESS: Measuring Willingness to Pay: A Comparative Method of Valuation

Abstract

Willingness to pay (WTP) is a metric that is widely valued and utilized among both practitioners and academics. However, the conceptualization of WTP is ambiguous, and this ambiguity is reflected across existing methods of measuring WTP. This paper first presents a formal mathematical framework that clarifies WTP as a distributional concept—rather than a single number—constructed as a function of customers, comparisons, and situations. The framework further reveals the operation of two comparative mechanisms, direct and indirect, by which situational factors affect WTP. This paper then introduces a new method to measure WTP—Comparative Method of Valuation (CMV)—that, unlike existing methods, is designed to account for the inherently comparative and situational nature of WTP. Across nine studies reported in the paper and four additional studies in the Web Appendix, the authors a) examine differences in results between CMV and choice-based conjoint as well as between CMV and the classic Becker-DeGroot-Marschak (BDM) methodology, b) demonstrate that CMV is a valid and reliable measure of WTP, and c) illustrate applications of CMV to managerial problems. In total, this paper offers both conceptual clarity and methodological advances to understanding the construction and measurement of WTP for practitioners and academics alike.