In economics, consumer surplus is the difference between the maximum that a consumer is willing to pay for a good or service, and what they actually pay for it (the price). You can think of consumer surplus as the 'profit' (or net benefit) that consumers get from buying. In order to measure the total consumer surplus in a market, we need to measure the area between the demand curve (which shows consumers' willingness-to-pay for the good or service) and the price, for the quantity that is purchased in total. So, in order to measure consumer surplus, you need to know the demand curve for the product. In practice, observing different prices and the quantities that consumers buy at those different prices gives us an idea of the shape of the demand curve (leaving aside the identification problem for now).
But what if you have a good or service that is given away for free? How do you estimate the consumer surplus then? That's where the questions in the title and first paragraph of this post come in. And this is pretty much what some researchers did recently, as described in this new NBER Working Paper (ungated version here) by Erik Brynjolfsson (MIT), Felix Eggers (University of Groningen), and Avinash Gannamaneni (MIT). The authors use a specific type of non-market valuation called discrete choice experiments (which I have used in research before, including in this paper):
Specifically, we ask consumers to make a choice between keeping a digital good or taking a monetary equivalent compensation when foregoing it. This approach measures willingness-to-accept rather than willingness-to-pay money and experimentally varies the offered monetary values.Which is more-or-less the same as the questions I started this post with (although in their experiment, each person was only asked the question in relation to a single monetary value). The interesting thing about their experiment is that it isn't just hypothetical:
In some of the experiments, we enforce the consumers’ choices, for instance be requiring them to give up Facebook for a given period before they get any payment. This makes their choices incentive-compatible: the rational thing to do is tell the truth when comparing alternatives options or being asked about valuations.Yes, in order to get the money, some consumers (randomly selected) actually had to give up Facebook. Their sample was in the thousands, and they found a median willingness-to-accept (in exchange for giving up Facebook for a month) of $48.49 in 2016, which decreased to $37.76 in 2017. Looking at this willingness-to-accept, it has plausible relationships with demographic and other variables:
The usage of Facebook per week (self-reported, measured on a 5-point scale from “less than 1 hour” to “more than 14 hours”) is a significant predictor for the value of Facebook (p = 0.006). The more time a consumer spends on Facebook, the more likely they are to keep their access... Similarly, the more friends someone has on Facebook (self-reported, measured on a 6-point scale from “less than 50” to “more than 1000”) the more compensation they require to leave Facebook (p = 0.024). In terms of activities on Facebook (measured on a 6-point scale ranging from “never” to “several times a day,”) consumers perceive significantly more value in Facebook the more they post status updates or share pictures and videos (p = 0.010), the more they like and comment (p = 0.018), and play games (p = 0.025). Watching videos is marginally significant (p = 0.080), while using the messenger and chat is associated with no additional value (p = 0.100). Consistently, we find significant substitution effects due other social media services, i.e., Instagram (p = 0.025), and video platforms, i.e., YouTube (p = 0.003). Thus, consumers who also use Instagram or YouTube are more likely to give up Facebook...
...we see that female respondents are more likely to keep Facebook than male users (p = 0.011). The same holds for older consumers (p < 0.001).The paper goes on to estimate willingness-to-accept values for other digital goods, which imply an annual consumer surplus that is as high as $17,350 for search engines (compared with just $322 for social networks collectively, including Facebook). The confidence intervals on these estimates are quite large (which is just as well - would it really take over $17,000 to get the median person to give up search engines for a year?).
The paper is written from the perspective that consumer surplus is a better measure of welfare than Gross Domestic Product (GDP). This is because, among other issues, when consumers substitute physical goods for digital goods, this reduces GDP even though it increases consumer welfare. If you're interested in thinking about better measures of national wellbeing than GDP, this is an important argument (although reading this paper is probably not the best place to start if you are interested in that - try here instead). If we wanted to better measure national wellbeing, then measuring consumer surplus in all markets (including markets where there is no price) would be a good option. But then we have to find a way to measure consumer surplus in markets where there is no price, and the Brynjolfsson et al. paper shows us one way to do this.
[HT: Marginal Revolution]