Do Consumers Really Know How Much They Are Willing to Pay?

Abstract

Economists often assume that consumers know exactly what they want and how much they are willing to pay for it, but this assumption is perhaps unjustified. Because people lack stable preferences, estimates of willingness-to-pay (WTP) obtained through surveys and experimental settings are often bias, irrational, and sometimes outright arbitrary. This paper examines data collected from a split-sample online survey of 1,058 participants to determine whether consumer preferences can be elicited in a systematic way that provides a rational estimation of WTP and a better prediction of consumer choice. Specifically, we facilitate the preference-discovery process by providing survey participants with the opportunity to observe the tradeoffs of their choices and the subsequent consequences on their stated WTP for fluid milk products. By using this approach, we force internal consistency between statements of value and preference orderings. We test the rationality of the results with an anchor test and we test predictive validity with a holdout choice. Our results indicate that the imposition of internal consistency yields more rational estimates of WTP, however there is no evidence to support the hypothesis that this method provides WTP estimates that lead to a higher degree of predictive validity.