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Estimating Consumers’ Willingness to Pay for the Individual Quality Attributes with DEA

Listed author(s):
  • Lee, Jeongdong
  • Repkine, Alexandre
  • Hwang, Seogwon
  • Kim, Taiyoo

In a highly competitive environment a product’s commercial success depends increasingly more upon the ability to satisfy consumers’ preferences that are highly diversified. Since a consumer product typically comprises a host of technological attributes, its market value incorporates all of the individual values of technological attributes. If the willingness-to-pay (WTP) for individual technological characteristics of a product is known, one can conjecture the overall WTP or the imputed market price for the product. The market price listed by the producer has to be equal to or lower than this WTP for the commercial survival of the product. In this paper we propose a methodology for estimating the value of individual product characteristics and thus the overall WTP of the product with DEA. Our methodology is based on a model derived from the consumer demand theory on the one hand, and the recent theoretical developments on the flexible DEA frontiers on the other hand. The paper also presents a real case study for the mobile phone market, which is characterized by its high speed of innovation. The suggested model and its empirical applications has implications for the extension of DEA methodology to the estimation of market value of a complex multi-attribute product and/or of a value of quality attribute that is not explicitly marketable in isolation. We also expect that the framework will shed some light on the successful way of product differentiation when the cost information for individual characteristics is available.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7848.

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Date of creation: Oct 2004
Publication status: Published in Journal of the Operational Research Society No. 10.vol. 5(2004): pp. 1059-1064
Handle: RePEc:pra:mprapa:7848
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  1. Smith, V. Kerry & Von Haefen, Roger, 1997. "Welfare measurement and representative consumer theory," Economics Letters, Elsevier, vol. 57(1), pages 63-67, November.
  2. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  3. Alcantud, J. C. R. & Manrique, A., 2001. "Continuous representation by a money-metric function," Mathematical Social Sciences, Elsevier, vol. 41(3), pages 365-373, May.
  4. Blumenschein, Karen & Johannesson, Magnus & Yokoyama, Krista K. & Freeman, Patricia R., 2001. "Hypothetical versus real willingness to pay in the health care sector: results from a field experiment," Journal of Health Economics, Elsevier, vol. 20(3), pages 441-457, May.
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