An understanding of how price affects demand forms the basis for taking pricing decisions. Typically this understanding is derived from various research techniques that reveal the sensitivity of demand to price, i.e., the price elasticity of demand.
One might wonder why not simply ask consumers how much they are willing to pay for a product. This does not help because what consumers claim they are willing to pay for a product differs from what they are actually prepared to pay during a purchase occasion. Survey questions usually elicit cursory answers. A direct question on how much they are willing to pay for a product often elicits bargaining behaviour with consumers stating prices lower than they would actually pay. It may also elicit a desire to please the researcher, or to not appear stingy, prompting consumers to state a higher price than they would actually pay.
Taking an indirect approach, asking consumers whether they would buy a product at a pre-selected price, yields answers that are potentially useful. By asking them to select a brand from choice sets in a manner that reflects the real world more closely, will yield responses that more closely reflect their true behaviour.
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