Augmenting conjoint analysis to estimate consumer reservation price

Consumer reservation price is a key concept in marketing and economics. Theoretically, this concept has been instrumental in studying consumer purchase decisions, competitive pricing strategies, and welfare economics. Managerially, knowledge of consumer reservation prices is critical for implementing many pricing tactics such as bundling, target promotions, nonlinear pricing, and one-to-one pricing, and for assessing the impact of marketing strategy on demand. Despite the practical and theoretical importance of this concept, its measurement at the individual level in a practical setting proves elusive. We propose a conjoint-based approach to estimate consumer-level reservation prices. This approach integrates the preference estimation of traditional conjoint with the economic theory of consumer choice. This integration augments the capability of traditional conjoint such that consumers' reservation prices for a product can be derived directly from the individual-level estimates of conjoint coefficients. With this augmentation, we can model a consumer's decision of not only which product to buy, but also whether to buy at all in a category. Thus, we can simulate simultaneously three effects that a change in price or the introduction of a new product may generate in a market: the customer switching effect, the cannibalization effect, and the market expansion effect. We show in a pilot application how this approach can aid product and pricing decisions. We also demonstrate the predictive validity of our approach using data from a commercial study of automobile batteries.