When Willingness-to-Pay Seems Irrational: The Role of Perceived Market Price

55 Pages Posted: 11 Dec 2022

See all articles by Ioannis Evangelidis

Ioannis Evangelidis

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Minah Jung

New York University (NYU) - Department of Marketing

Alice Moon

Georgetown University

Date Written: December 5, 2022

Abstract

One of the most prominent areas of research in psychology concerns understanding people’s preferences. In this paper, we critically examine one of the most used preference elicitation procedures: willingness-to-pay (WTP). Contrary to assumptions that WTP captures personal preferences (i.e., liking) for goods, we argue and empirically demonstrate that WTP is often primarily driven by respondents’ beliefs about the market value (i.e., price) of goods. The understanding that WTP primarily reflects respondents’ beliefs about the market value of goods can explain various preference anomalies, such as (a) previously documented “preference reversals” between WTP and other measures of preference that do not reflect perceived market price (e.g., choice), and (b) people who have personal utility for a product provide similar valuations relative to people who do not have personal utility for it. To this end, we advance an intervention, which we call the “WTP Zero” task, that can shift WTP closer to personal preferences. We find the WTP Zero task helps: (1) attenuate or eliminate preference reversals between WTP and choice, and (2) differentiate between people for whom products carry personal utility versus people for whom they do not. Finally, we find that this simple and cost-effective WTP Zero task provides valuations comparable to incentivized procedures even when hypothetical valuations are elicited.

Keywords: valuation, willingness-to-pay, preference reversal, market value, scale compatibility

Suggested Citation

Evangelidis, Ioannis and Jung, Minah and Moon, Alice, When Willingness-to-Pay Seems Irrational: The Role of Perceived Market Price (December 5, 2022). Available at SSRN: https://ssrn.com/abstract=4294247 or http://dx.doi.org/10.2139/ssrn.4294247

Ioannis Evangelidis

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

Rotterdam
Netherlands

Minah Jung (Contact Author)

New York University (NYU) - Department of Marketing ( email )

Henry Kaufman Ctr
44 W 4 St.
New York, NY
United States

Alice Moon

Georgetown University ( email )

Washington, DC 20057
United States

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