Sequential Choice Designs to Estimate the Heterogeneity Distribution of Willingness-to-Pay

• Activity Number: 604
• Type: Topic Contributed
• Date/Time: Thursday, August 4, 2011 : 8:30 AM to 10:20 AM
• Sponsor: Section on Statistics and Marketing
• Author(s): Vishva Danthurebandara*+
• Companies: Katholieke Universiteit Leuven

Abstract

There are two approaches for estimating the distribution of willingness-to-pay (WTP) based on choice experiments. One is to work in the usual preference space in which the random utility model is expressed in terms of partworths. The other approach reformulates the utility in terms of WTP and estimates the WTP and the heterogeneity distribution of WTP directly. Though often used, working in preference space has severe drawbacks as it often leads to WTP-distributions with long flat tails, infinite moments and many extreme values. By moving to WTP-space, authors have tried to improve the estimation of WTP and its distribution. We further improve the estimation of individual level WTP and corresponding heterogeneity distribution by designing the choice sets more efficiently. We generate individual sequential choice designs in WTP space. The key feature of our approach is that it uses Bayesian methods to generate individually optimized choice sets sequentially based on prior information of each individual which is further updated after each choice made. Based on a simulation study, we conclude that the sequential approach improves the estimation results substantially.