## Sunday, 29 April 2018

### How much money would you accept to give up Facebook for a month?

If I offered you \$10, would you give up Facebook for a month? What about \$20? \$50? \$150? On the other hand, if you've already bought into #deleteFacebook, then I wouldn't need to offer you anything. Asking how much I would have to pay you to give up Facebook seems like a fanciful question, but it has an important implication.

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: