Question

What are the advantages and disadvantages of using willingness to pay as a measure of value? What are some alternatives?

Answer 1

Willingness to pay is the maximum amount a person is prepared to exchange, sacrifice, or pay, to receive services or goods, to avoid something undesired. It is the foundation of the economic theory of value.

Advantages

• Competitive advantage; better pricing decisions
• Multifold increase in profits can be achieved through a slight change in prices
• Organizations can get competitive advantage by providing services, and, products based on customer-choice criteria
• Can be ascertained for cost-based analysis through a simple survey
• Enables a comprehensive valuation of benefits
• Organizations can deal with challenges posed by overcapacity, shorter product lifecycles, and, increasing competition.
• Technological advancements have reduced search costs for consumers, they are not restricted by channels, or, sellers. An understanding of WTP will thus help organizations to offer innovative products at price that equals the consumers' willingness to pay

Disadvantages

• There can be inaccuracies, and, the value may not be exact
• Expectations, or, biased experiences may be used
• May be taken as a cost, rather than an estimate
• Market prices do not always reflect on the value of the ecosystem services
• Seasonal variations, numerous other effects should be considered
• Benefits overstated when cost of bringing goods to market not considered

Alternatives

• Human capital approach for cost-benefit analysis for estimating external costs, proposed by Schelling, and, Mishan, it is used to value human life, and, evaluating quality of life
• Revealed Preference - Value of non-market attributes, based on consumer choices
• Stated Preference - Depends on hypothetical market, or, contingent valuation
• Discrete choice experiments
• Estimation of use, and, non-use values - direct, indirect, option, and, existence values