Willingness to Pay for Information: An Analyst's Guide

This paper defines, illustrates, and critiques the different ways in which researchers have contemplated and estimated a consumer's willingness to pay for a particular attribute of a good or service. In particular, the authors are interested in exploring the apparent difficulty in measuring willingness to pay for information. It becomes more complicated to measure the value of having information when the actual information influences demand in its own right. This implies that information such as food dating is likely to be underproduced in a free market, even less than it is given the public goods aspect of the attribute. It also means that the bias in measuring willingness to pay will depend on whether the attribute in question adds value to the good. Over the past decade, a number of articles have appeared in this and other related journals attempting to measure willingness to pay for given attributes of a particular consumer good (Huang, Kan, and Fu 1999; Wessels and Anderson 1995; and Huang 1993). While the majority of these articles have been careful empirical examinations and have included insights into the particular market and attribute concerned, what has been missing from this literature is a careful and exhaustive treatment of willingness to pay as a construct and as a policy tool. In the majority of the articles previously mentioned, the different ways of measuring a consumer's willingness to pay and the advantages and disadvantages of each strategy are given insufficient attention. Comprehensive models of the theoretical construct that willingness to pay is designed to measure have been lacking. Several chapters of Caswell (1995) give a good review of the former, but a well-developed theoretical discussion or modeling of willingness to pay, pa rticularly as it applies to information attributes, is relatively incomplete, if not nonexistent. This paper is an attempt to fill this gap. Often, willingness to pay has been used as a tool in cost-benefit analysis. For example, if a policymaker wants to figure out whether to provide a service to consumers, willingness to pay for the service can be compared to the government's expected cost to determine whether the spending is justified. This is a particularly important task if the service in question has never been provided before or if there is no formal market for it. This type of analysis, however, is more appropriate for some situations than others. In this paper, authors will illustrate how willingness to pay for information--how much a consumer values knowing when or where his or her product was made or how many calories their favorite food has, for example--is not able to be measured through traditional means. This is because the actual information also impacts a person's willingness to pay for the good or service. Therefore, any researcher measuring the willingness to pay for information is also measuring the implicit willingness to pay for the attribute associated with the information simultaneously. Section II introduces the concept of willingness to pay and its measurement in abstraction. Section III is a catalogue of different methods researchers have used to measure a consumer's willingness to pay for a product with enhanced attributes. Section IV illustrates the importance of willingness to pay by using it in a hypothetical cost-benefit analysis. In the process, this last section illustrates the importance of willingness to pay with respect to consumer policy analysis and the theoretical and empirical hurdles that arise when the attribute being analyzed is information about a product. Section V is a summary of the main points of the article. MODELING WILLINGNESS TO PAY The Case of a Price Change The theoretical literature has paid much more attention to willingness to pay for a price change than willingness to pay for any other attribute of a good. When the price of a certain good changes, how much would a consumer be willing to pay for that change? …