How Should Consumers' Willingness to Pay Be Measured? An Empirical Comparison of State-of-The-Art Approaches

This study compares the performance of four commonly used approaches to measure consumers’ willingness to pay (WTP) to real purchase data (REAL): the open-ended question format (OE), choice-based conjoint analysis (CBC), the incentive-compatible mechanism proposed by Becker, DeGroot, and Marschak (1964) (BDM), and incentive-aligned choice-based conjoint analysis (ICBC). With this five-in-one approach, we test the relative strengths of the four measurement methods, using REAL as the benchmark, on the basis of statistical criteria as well as decision-relevant metrics. Our results indicate that BDM mechanism and incentive-aligned conjoint analysis can pass statistical and decision-oriented tests. We find respondents to be more price sensitive in incentive-aligned settings than in non-incentive-aligned settings and the real purchase setting. We further find a large number of none-choices under incentive-aligned conjoint analysis in comparison to hypothetical conjoint analysis. Our study also uncovers an intriguing possibility: even when the open-ended question format and choice-based conjoint analysis generate hypothetical bias, they may still lead us to the right demand curves and right pricing decisions