Bayesian Statistics and Marketing, 2nd Edition

11Case Study 2: WTP and Equilibrium Analysis with Conjoint Demand

Abstract

In this chapter, we will consider how conjoint data can be used as a valid measure of demand and how to compute a valid Willingness to pay (WTP) measure based on a conjoint study which is properly designed to measure demand. As is well known, WTP is not a market price and we consider what additional data and assumptions are required to use a conjoint survey as part of a market price calculation. This will allow us to provide a true measure of what a firm can change for a product feature and what sort of profits can be generated by the addition of this feature–something that has eluded the conjoint literature until very recently.

In this case study, we will extend our analysis of conjoint data by regarding the conjoint study as a method of demand measurement, in particular, a method for properly assessing the demand for products defined by a set of features. We will begin by providing some of the economic foundations for interpreting conjoint data as valid demand data. We will also discuss some of the advantages and disadvantages of conjoint data relative to observation demand data.

We will define a proper measure of WTP for products and product features and discuss the relationship between this measure and other ad hoc approaches that are widely used by conjoint practitioners.

Clearly, demand is only one half of the story. If a properly specified set of competitors, costs and equilibrium definition ...