The Cross-Price Effect on Willingness-to-pay Estimates in Open-ended Contingent Valuation

Pricing decisions for new product are always challenging due to limited information such as market needs and competition. Contingent valuation is a widely used technique to elicit value for new products or non-market goods. Previous literature has shown that potential buyers use a reference product to form their opinion about the value of a new product (Monroe and Della Bitta, 1978). Therefore, pricing decision is an interactive process. Based on the extensive marketing literature about cross-price effect, we investigate the impact of reference price on consumer willingness-to-pay (WTP) for multiple similar products in an open-ended contingent valuation context. Two generalizations of the cross-price effect: the neighborhood price effect and the asymmetric price effect are examined. Our results show that the cross-price effect on WTP is prominent and the neighborhood price effect also holds in contingent valuation. However, we don’t reach any conclusion about the asymmetric price effect based on our limited information.