Willingness to Pay: A Comparative Method of Valuation

Willingness to pay (WTP) is a measure that is widely valued and utilized among both practitioners and academics. This paper presents a formal mathematical framework that conceptualizes WTP as a distributional concept—rather than a single number—that is constructed as a function of properties of customers, comparisons, and situations. This framework further reveals the operation of two comparative mechanisms, direct and indirect, by which situational factors affect WTP. This paper introduces a new measurement tool, Comparative Method of Valuation (CMV), that, unlike prior efforts to measure WTP, is designed to account for the inherently comparative and situational nature of WTP. Across nine studies reported in the paper and four additional studies in the Web Appendix, the authors examine differences in results between CMV and conjoint as well as between CMV and the classic Becker-DeGroot-Marschak (BDM) methodology, demonstrate the CMV as a valid and reliable measure of WTP, and illustrate applications of the CMV to managerial problems. In total, this paper offers both conceptual clarity and methodological advances to understanding the construction and measurement of WTP for practitioners and academics alike.