Economic Valuation of Product Features
50 Pages Posted: 11 Oct 2013 Last revised: 16 Aug 2014
Date Written: May 1, 2014
We develop a market-based paradigm to value the enhancement or addition of features to a product. We define the market value of a product or feature enhancement as the change in the equilibrium profits that would prevail with and without the enhancement. Conjoint data can be use to construct the demand system necessary to compute equilibrium prices but assumptions about competitive offerings and cost are required as well. We contrast our approach to the frequent practice of computing what we call pseudo-WTP (willingness to pay) and show that pseudo-WTP may greatly over-estimate the value of a feature. We also consider a WTB (willingness to buy) analysis and show how this can overstate market share or sales gains from addition of features. We illustrate our methods using a survey of digital camera owners.
Keywords: product features, valuation, patents, conjoint, Bayesian Hierarchical Models, demand analysis
JEL Classification: C5, C9, L1, l5, D4, M3, K00
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