Economic valuation of product features
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We develop a market-based paradigm to value the enhancement or addition of features to a product. We define the market value of a product or feature enhancement as the change in the equilibrium profits that would prevail with and without the enhancement. In order to compute changes in equilibrium profits, a valid demand system must be constructed to value the feature. The demand system must be supplemented by information on competitive offerings and cost. In many situations, demand data is either not available or not informative with respect to demand for a product feature. Conjoint methods can be used to construct the demand system via a set of designed survey-based experiments. We illustrate our methods using data on the demand for digital cameras and demonstrate how the profits-based metric provides very different answers than the standard welfare or Willingness-To-Pay calculations.
KeywordsProduct features Conjoint Equilibrium profits Bayesian analysis
JEL ClassificationC11 C23 C25 C81 D12 D43 K11 L13 M3
Rossi would like to acknowledge the Collins Chair, Anderson School of Management, UCLA for research funding. Allenby thanks the Fisher College of Business at Ohio State University for generous research support. All correspondence may be addressed to the authors at the UCLA, Anderson School of Management, 110 Westwood Plaza, Los Angeles, CA 90095; or via e-mail at firstname.lastname@example.org.
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