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In Economics, What Is the Willingness to Pay?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 19 August 2014
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Willingness to pay is a reflection of the maximum amount a consumer thinks a product or service is worth. It is considered when developing an asking price for products and services, although it is important to note that it is not the final arbiter of pricing. In addition to being involved in the pricing process, it is also considered when conducting larger studies about how consumers interact with products and services.

For individual consumers, willingness to pay can vary, depending on their personal assessment of the value of a product or service. Surveys conducted by colleges and universities have shown, for example, that willingness goes up when people are looking at well-respected and well-known colleges and universities, and it goes down for smaller and less famous institutions. Families that value education generally put a higher value on it, while families that have not sent many members to college may value a college education at a lower number. It can also be heavily linked with branding, with people being willing to pay more for comparable brand name products.

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When pricing products, companies want to hit a price point that most people are willing to pay that also allows the company to generate a profit. Sometimes, people may place the value of a product below the value of production, leaving the company with a problem. If the product is priced at the point people will pay, the company will take a loss, but if it is priced more reasonably, the company may not make as many sales.

This concept also plays into studies such as cost-benefit analyses and efficiency studies. People involved in such studies are usually tested with choice experiments. In these experiments, individuals are confronted with an array of items to choose from, and are asked a series of questions about the cost of these items. Choice modeling of this nature is also used for developing pricing strategies and for exploring how people respond to different prices; prices ending in $0.95, for example, tend to be viewed as more acceptable than prices ending in random numbers like $0.43.

Within a larger economic context, looking at how people interact with prices can become very important. Understanding how consumers make buying choices on the basis of price, especially for luxury goods, is an important part of studying how consumers make choices in general. Willingness to pay studies can be applied to everything from health care systems to sales of groceries.

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ysmina
Post 3

People would rather pay $1.95 for something rather than $1.43?! That's weird.

I remember when the .99 trend started in stores. All the prices suddenly went from whole numbers to .99 at the end and we would go crazy for it. Somehow that 1 cent discount made so much of a difference for us. I guess this is a choice modelling strategy as well and it seems to have worked really well.

We are studying 'willingness to pay' definition and 'willingness to accept' definition right now in Economy class. Willingness to accept is like the opposite of willingness to pay. It measures how little money people are willing to be paid to give up a good or service.

Even though I never heard of these terms before, it seems very familiar to me. I do a lot of selling and shopping on online auction sites and I think people express their willingness to pay and receive there all the time. The final bids people make for an item is their willingness to pay and the buy now price the seller lists is his or her willingness to receive.

turquoise
Post 2

@simrin-- Many of these factors are very subjective so I don't think that they would be very useful to a company when trying to figure out what buyers' willingness to pay is.

I think companies would want to stick to factors that are more definite- like buyers' income, the cost of producing that good or service and competition. Maybe customer preferences would be the only factor that's subjective but still worth considering. But I think that a willingness to pay survey that covers many people would give a company pretty good idea about that as well.

SteamLouis
Post 1

I wonder what other factors researchers consider when they're trying to figure out what people are willing to pay for a product?

I'm sure that income is the first thing to consider because people are naturally willing to pay more when they make more money.

Something else that would be really interesting to look at is the relation between personality type and willingness to pay economics. I know many people who are stingy and refuse to pay over a certain amount for products regardless of making a high income. I think it would be really hard to please customers with this personalty type and still make a profit as a company.

I also think that the price people are willing to pay goes down as their age increases.

It would be really interesting to see if there is some correlation between these factors and the willingness to pay. But I'm sure more research would make it even more difficult for companies to select a price that everyone is satisfied with.

What do you think?

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