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Many researchers seek to compute WTP for features using discrete choice experiments (conjoint analysis). Common approaches overstate WTP due to lack of consideration of competitive context. After all, consumers might obtain the same or substitutable features at lower prices elsewhere in the marketplace. To estimate WTP assuming monopoly will overstate WTP for the firm's offerings.
We demonstrate WTP estimation via market simulations involving realistic competitive scenarios, including the None alternative.
One approach involves simulating the firm's offering without the enhanced feature vs. fixed competitive offerings and the None alternative. The share of preference is recorded. Next, the firm's offering is enhanced and the price delta that drives the share back to the base case amount is the estimated WTP.
A second approach does not hold competition constant, but simulates a random distribution of competitive feature and price reactions, assuming that competitors can react in either rational or irrational ways to the firm's enhanced product offering.
For both approaches, we demonstrate how bootstrap sampling can lead to confidence interval estimates for WTP.
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