Heterogeneity Distributions of Willingness-to-Pay in Choice Models

33 Pages Posted: 6 Sep 2006

See all articles by Garrett Sonnier

Garrett Sonnier

University of California, Los Angeles (UCLA) - Anderson School of Management

Andrew Ainslie

University of Rochester - Simon Business School

Thomas Otter

Goethe University Frankfurt - Department of Marketing

Date Written: February 6, 2007

Abstract

We investigate direct and indirect specification of the distribution of consumer willingness-to-pay (WTP) for changes in product attributes in a choice setting. Typically, choice models identify WTP for an attribute as a ratio of the estimated attribute and price coefficients. Previous research in marketing and economics has discussed the problems with allowing for random coefficients on both attribute and price, especially when the distribution of the price coefficient has mass near zero. These problems can be avoided by combining a parameterization of the likelihood function that directly identifies WTP with a normal prior for WTP. We show that the typical likelihood parameterization in combination with what are regarded as standard heterogeneity distributions for attribute and price coefficients results in poorly behaved posterior WTP distributions, especially in small sample settings. The implied prior for WTP readily allows for substantial mass in the tails of the distribution and extreme individual-level estimates of WTP. We also demonstrate the sensitivity of profit maximizing prices to parameterization and priors for WTP.

Keywords: Bayesian analysis, Choice modeling, Willingness-to-Pay

JEL Classification: C11, M3

Suggested Citation

Sonnier, Garrett and Ainslie, Andrew S. and Otter, Thomas, Heterogeneity Distributions of Willingness-to-Pay in Choice Models (February 6, 2007). Available at SSRN: https://ssrn.com/abstract=928412 or http://dx.doi.org/10.2139/ssrn.928412

Garrett Sonnier

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Andrew S. Ainslie

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Thomas Otter (Contact Author)

Goethe University Frankfurt - Department of Marketing ( email )

Frankfurt
Germany
++49.69.798.34646 (Phone)

HOME PAGE: http://www.marketing.uni-frankfurt.de/index.php?id=97?&L=1

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