In this exercise, you will analyse a product informed by the concept of willingness-to-pay (WTP). It is an experiential exercise: you experience the process of estimating WTP and responding by identifying ways to improve your product to better match the market.
The main objective is for you to try to assess a market “in the wild” by analysing a consumer’s WTP and generating ideas, informed by economic reasoning, about how to respond to what you learn.
There is a significant learning-by-doing component in this exercise. You will need help from your spouse, child, sibling, other family member, or a friend. The person who helps you will be the subject of your study.
Use a heading for each part and include your written response and any photos, graphs or other materials, and note the source of any material used.
(a) Pick a good and a subject (15 points)
First, you should pick subject and a good (product or service) that you will analyse. It is crucial that the good you choose is something that
i. you personally never or almost never use/buy and do not know much about, but ii. the subject is very familiar with and uses it frequently.1
In part (a), you need to explain a good you chose. Here, it is not the place to talk about the “needs” (you will do that in part (c)). What is required is a verbal description of the good the way you would describe it outside of an economics classroom, in addition to noting its main economic features.
Try to be as specific and detailed as possible. For example, “milk” or “carton of milk” is not as specific as desired; rather, you might want to describe the brand (Lala), size (500 ml), category (non-fat), and other attributes that matter.2
If you think that I might be unfamiliar with the good (ideal scenario from my perspective as this would be more fun and learning opportunity for me), then attaching a picture might be a good idea. Keep in mind that I need to be able to visualize what the good is; your task in (a) is to help me with that visualization.
1 Some examples of goods chosen in previous classes: a male student asks his wife to be a subject and analyzes a make-up kit; another student asks her child to be a subject and analyzes a video game platform; another student asks her spouse to be a subject and analyzes a good that he frequently buys for his hobby. If I were a student in ECN 511, then I would ask my wife to be a subject and probably pick a nail polish or something for make-up/hair. If I were to study my son (4th grade), I would probably pick something related to Minecraft (or whatever game he is playing right now). If my wife was to study me, then the product would be software called STATA used for statistical analysis or a history book.
2 Carton of milk might not be an appropriate good to be studied in this exercise as this is a product that all of us are familiar with. I want you to be outside of your familiarity zone with the good you analyze. You are supposed to learn about the good from a consumer perspective rather than be biased with your own experience.
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The good can be whatever you choose as long as conditions (i) and (ii) are met. For example, food item that you do not eat because of your preferences or allergies; or a cosmetic that you are not familiar with; or software that your subject uses in their professional capacity, but you never use it (check footnote 1 for some ideas). I would recommend products (tangible goods) instead of services as the latter are usually more difficult for analysis. But the choice is completely up to you.
In a typical research study, we always describe the subjects (demographic variables). Since the study involves just one subject who might not want you to share any information about her/him, I do not require any description of the subject. There will be no score subtraction if you do not talk about the subject.
However, since this might also help with your analysis, consider as an option to provide a brief explanation of who the subject is.
Focus on what matters. For example, your relationship with the subject or their name should not be disclosed because they are not relevant pieces of information for the WTP analysis. You need to keep the study anonymous and professional. Do not provide any personal details or information about the subject that she/he would not want you to share.
(b) Measure subject demand (20 points)
Second, figure out the subject’s demand for the good described in (a). Here, I would like you to explain in detail the process that you and the subject went through.
One idea based on the exercise in class is to ask:
i. At the price you paid, how many of the product do they buy per month (or year).
ii. Then offer a hypothetical price that is 25% lower and see how many, then 50% lower, and so on.
iii. Then offer a hypothetical price that is 25% higher and see how many they would buy. Then 50% higher, and so on until they buy zero.
For example, consider the following table tracking a subject’s behavior. (Your analysis should include a table like that.
Cash (in SAR) Subject’s choice Number bought per period
2 Buy the good 2
3 Buy the good 1
4 (Actual Price Paid Buy the good 1
5 Buy the good 1
6 Keep their cash 0
The subject switched at 6 SAR and this is where the experiment ends. From the table above, we know that WTP is strictly smaller or equal to 6 (their individual demand curve starts at 6 with 0 quantity demanded and declines through q = 2 and p = 2)
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If the choose more than one of the good at any price you can draw their individual demand curve. Knowing the price sensitivity of demand for an individual is useful for understanding demand across the market as a whole.
(c) Analysis of attributes (20 points)
Third, determine two (2) main attributes of the good that affect your subject’s WTP.
What are these attributes? What needs do they satisfy? Here, you are having a discussion with the subject. (Think about the good you are analysing as a “basket of attributes” in the two-dimensional graph where each axis is an attribute.) Summarize the discussion and its conclusions.
Next, figure out the importance of each attribute – here, you may want to ask how WTP changes when you modify the attributes. Describe the process you and the subject went through and the conclusions.
In (c), we want to understand which attributes matter in determining WTP and how much they matter in terms of changing WTP.
(d) Respond to this market knowledge (25 points)
Fourth, given the two attributes you identified in (c), propose two ways the producer of this product might respond to the knowledge you have acquired.
First, by way of how the product is sold (pricing, market, geography, etc). Second, by modifying the product itself.
In short, what would you do to make the product better match the demands of consumers? Note that I do not ask about the costs of making the changes you propose – this is not relevant for this exercise.
Be imaginative and innovative and think about various economic concepts of consumer demand. Do not replicate what companies producing the good are already doing or did in the past. This is the moment for your creativity to shine.