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Heterogeneity in willingness-to-pay for theatre productions: Individual

specific willingness-to-pay estimates for theatres, shows and their attributes
Article in Scottish Journal of Political Economy · July 2011

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Scottish Journal of Political Economy, Vol. 58, No. 3, July 2011
r 2011 The Authors. Scottish Journal of Political Economy r 2011 Scottish Economic Society. Published by Blackwell
Publishing Ltd, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
HETEROGENEITY IN WILLINGNESS-
TO-PAY FOR THEATRE PRODUCTIONS:
INDIVIDUAL SPECIFIC WILLINGNESS-
TO-PAY ESTIMATES FOR THEATRES,
SHOWS AND THEIR ATTRIBUTES
Jose M. Grisolian and Ken Willisnn
Abstract
This paper investigates people’s preferences for live theatre, and heterogeneity in
willingness-to-pay (WTP). A stated preference discrete choice model estimates
utility and WTP for different attributes of theatre productions. Previous studies
assumed fixed coefficients across all theatre-goers. This study allows coefficients of
attributes to vary across individuals in the population, providing information on the
heterogeneity of tastes. Theatre-goers’ choices are used to estimate individual-
based parameters for a person’s tastes in theatre productions. The analysis reveals
the heterogeneity of tastes for different types of plays and ticket price; and the
significance of ‘reviews’ by critics and ‘word of mouth’ opinions as important
variables determining choice.
I Introduction
Early research on the demand for the performing arts considered demand mainly a
function of price. Subsequently more sophisticated models and empirical
applications included not only own price, but also the price of substitutes, as
well as the quality of the theatrical production in the demand function (see
Throsby, 1994; Corning and Levey, 2002; Akdede and King, 2006; among others).
These studies used revealed preference (RP) data to assess the effect of the
attributes of the production, and the effect of variations in socio-economic and
demographic characteristics, on demand. The study reported here, in contrast,
uses stated preference (SP) data. SP data overcomes many of the problems
associated with RP data, and also allows heterogeneity in tastes and preferences
to be more fully explored.
The aim of this study is to assess the effect of the characteristics of theatre
productions on demand, and in particular the effect of information about
n
Universidad de Las Palmas de Gran Canaria
nn
University of Newcastle
378
H E T E R O G E NE I T Y I N W I L L I N G N E S S - T O - P A Y 379
theatrical productions on demand; and also to explore the degree of

heterogeneity of tastes for these attributes among theatre-goers. The character-
istics include type of production (e.g. comedy, drama, experimental, musical,
etc.), genre (classic, modern, contemporary, etc productions), author, venue
(theatre), and information about the production (e.g. critics’ reviews, and word
of mouth).
Theatres supply a niche market, and need a heterogeneous programme of
shows to maintain theatre-goer interest and demand. However, within this
variety of shows, theatre managers and producers of plays have discretion over
which shows they will stage; and discretion in the attributes of shows (e.g.
whether they will stage shows with famous actors, etc.), all of which will affect
ticket sales and prices. This study explores these issues by investigating what
attributes of shows will affect demand; and how much theatre-goers are willing
to pay for changes in the discretionary attributes of shows.
The study adopts a ‘goods characteristics’ approach (Lancaster, 1966) to
define each play, describing it in terms of its measurable characteristics or
attributes; and applies a discrete choice analysis to derive estimates of the
importance of these attributes. From these parameter estimates, it is possible to
determine willingness-to-pay (WTP) for different attributes and types of plays
for each individual in the sample. Models of demand in previous studies have
assumed that the effect of the characteristics of the production were fixed across
all theatre-goers. This study, in contrast, allows coefficients of the attributes to
vary across individuals in the population, providing useful information on the
heterogeneity of tastes among the population.
The estimation of individual-based parameters in discrete choice modelling is
an emerging field, with only a limited number of applications e.g. in recreational
demand (Train, 1998), transport (Sillano and Ortúzar, 2005; Hensher et al.,
2006; Hess, 2007) and demand for water quality (Scarpa et al., 2004). This study
is the first application of an individual parameter (IP) discrete choice model to
estimate the demand for theatre productions and artistic services in general.
Individual-based parameters are interesting for a number of reasons: they
provide precise information of individual tastes in the sample, identify the degree
of heterogeneity in tastes and preferences, and make the model more realistic.
Individual specific parameters are also useful for management and marketing
purposes, in pricing, and in the selection of artistic productions to stage, since
they provide information on the distribution of tastes and WTP of theatre-goers.
Individual-specific parameters can also be applied to derive consumer surplus
estimates and the social value of theatres and artistic productions, providing
an alternative methodology to RP, such as the travel-cost method (see Forrest
et al., 2000), to assess the case for subsidising theatres.
The paper is structured as follows: in section II an explanation of discrete
choice models is presented covering the basic multinomial logit (MNL), mixed
logit (MXL) and the procedures to estimate individual-based parameters;
section III provides a description of the experimental design and the ques-
tionnaire; section IV describes the data in the sample; section V presents the
modelling results, comparing standard logit with mixed logit and documenting
Scottish Journal of Political Economy
r 2011 The Authors. Scottish Journal of Political Economy r 2011 Scottish Economic Society.
380 J. M. GRISOLIA AND K. WILLIS
the IPs estimation; this is followed by a section on estimates of WTP for various
attributes of productions; and finally some conclusions are drawn.
II Theoretical Background
Discrete choice models are based on the random utility model (see, for instance
Ortúzar and Willumsen, 2001) which postulates that each good provides utility
that can be measured in terms of the characteristics of the good, subject to some
error term. It is assumed that individual n can choose between J alternatives (in
this case theatre shows) from j 5 1 to J. Since the study adopts a SP choice
experiment, the respondent will face T choice situations from t 5 1 to T. Thus,
the utility of alternative j for individual n in the choice situation t can be
expressed in terms of the following expression:
Unjt ¼ bXnjt þ enjt ; ð1Þ
where Xnjt is a vector of observed variables and b is a vector of coefficients to be
estimated. The second term is stochastic and represents the part of the utility
which is not observed by the researcher. Assumptions made about the
distribution of the random error part lead to different types of model. The
simplest model is the MNL which is derived by placing restrictive assumptions
on the random component of the utility: error disturbances are assumed to be
independently and identically distributed (IID) according to a Type 1 extreme
value distribution with the cumulative distribution function. For linear indirect
utility, it can be proven (McFadden, 1973) that the probability of the individual
utility of alternative j in the choice situation t is the largest among those in the
choice set C facing individual n is
expðb0 xjtK Þ
Pnjt ¼ P 0 8j; k 2 C: ð2Þ
k expðb xjtK Þ
A MXL is a more general model that overcomes restrictions of MNL (see,

McFadden and Train, 2000; Train, 2003) introducing variation in the
parameters among the population. Its specification is similar to the MNL, but
it assumes that the vector of bn parameters are now random and depends on the
individual n.
In a SP choice experiment, like the one implemented here, individuals face a
series of T choice situations. Assuming that IPs bn are known, the probability of
the sequence of choices is the product of the logit and represented by Pðyn jbn Þ.
However, the researcher does not know bn and therefore the probability that the
individual n chooses the sequence of options yn will be the conditional
probability associated to the value of b
Pðyn Þ ¼ Pðyn jbn ÞPðbn ¼ bÞ: ð3Þ
For a continuous variable this probability is calculated with an integral where
the logit probability is weighted with f(bn) which is the density function of bn:
Z
Pðyn Þ ¼ Pðyn jbn Þfðbn Þ: ð4Þ

The estimation processes for both models consists of maximising the

likelihood function, although there are alternative ways to estimate a MXL
such as Bayesian estimation (for a discussion about both methods see Sillano
and Ortúzar, 2005). The likelihood function is the product of the probabilities of
the sequence of choices. The parameters b that maximise this function are the
estimates.
In the case of a mixed logit, since the probability Pn cannot be calculated it
has to be approximated by simulation, taking draws from the distribution of bn
in the population, and weighting them with the logit to estimate the mean:

_ 1X R
P¼ Lni ðbr Þ: ð5Þ
ni R r¼1
This simulated Pn can then be inserted into the likelihood which is the
simulated log likelihood.
The IPs are by obtained conditioning the population distribution of
parameters b, from the MXL model, on the real choices made by the individual.
This information works as a prior in Bayes’ rule. Considering individual choices
Yn it is possible to derive the conditional density hðbn jyn Þ of any bn taking the
Bayes’ rule:
X P
Pðyn jbn Þgðbn jb; Þ
hðbn jyn ; b; Þ¼ P : ð6Þ
Pðyn jb; Þ
This ratio shows that the conditional distribution hðbn jyn Þ of the IPs can be
obtained as the probability of observing the individual choices given bn
multiplied by the range of betas in the population, divided by the probability of
observing these choices in the population of betas. This last expression is the
mixed logit represented in equation (4) and it is constant.
The mean of the estimated IPs is calculated as the mean of b in the
subpopulation of individuals who chose yn, using the integral:
Z X
¼ bhðb jyn ; b;
b Þdb: ð7Þ
n
The conditional distribution in equation (9) can be replaced by equation (8)

and the integral can be solved through simulation. This procedure involves
taking draws of br from the population density function and weighted them with
the probability of choices yn based on these (logit) draws:
Pn ðyn jbrn Þ
PR r
: ð8Þ
r¼1 Pn ðyn jbn Þ
Thus, the expected individual estimation parameter is

PR r
b Pn ðyn jbrn Þ
b ¼ Pr¼1
R r
: ð9Þ
r¼1 Pn ðyn jbn Þ

III Experimental Design

Literature on demand for theatre includes a number of RP econometric studies that
analyse actual choices made by theatregoers (see, for instance Urrutiaguer, 2002).
The approach adopted here is different because a controlled experiment is
implemented offering individuals a set of hypothetical scenarios containing different
choices, and asking them which alternative they most prefer, in any choice set.1
Following discussions with theatre directors, along with information provided by
focus groups of theatre-goers before the survey, a number of attributes and attribute
levels were identified as influencing the choice of which theatre play to attend. These
attributes are described in Table 1, and comprise: venue, type of play (genre),
repertory classification, quality of production as reported by critics or in reviews,
quality of production from word of mouth and whether the writer is known or not.
Apart from price, the other attributes are qualitative. These qualitative
variables were introduced into the model through several dummy variables; so
that, if there are L levels for a particular variable, L 1 dummies are estimated.
The levels for both ‘reviews’ and ‘word of mouth’ (WOM) are ordinal, and
clear in their meaning. ‘Type of play’ and ‘repertory classification’ are
multinomial, and understood by theatre-goers. Type of play included ‘experi-
mental theatre’ as a level to represent the phrase: ‘experimental theatre/fringe
theatre/performance’. The reputation of the author is expressed as a binary
variable of ‘known’ vs. ‘unknown’, with ‘unknown’ being the base case.
The different theatre venues represent the labels in the experiment. They were
always presented in the same position on each choice card, providing an organised
framework for the respondent. The five theatres represent the five most important
theatres in the vicinity of Newcastle. These theatres were suggested by theatre
managers for inclusion, and their status confirmed in the focus groups. However,
within this list, the Theatre Royal and Northern Stage (both in Newcastle), along
with Sunderland Empire, stage productions almost exclusively by professional
actors, singers, and musicians; and are also run by professional management
teams. The other theatres are home to amateur productions (People’s Theatre) or
less well known productions and players (Live Theatre). The Theatre Royal is a
traditional Victorian theatre, a large, imposing, classic building, with a Greek
portico, in the centre of the city. Conversely, Northern Stage is a modern but
much smaller professional theatre, built in a more contemporary architecture
style. Live theatre is a small venue located in the quayside area of Newcastle with
a seating capacity of 170. The People’s Theatre is situated in Jesmond, in
Newcastle, and has a not inconsiderable seating capacity of 500, despite being an
amateur theatre. Finally, Sunderland Empire is similar in its interior to the
Theatre Royal, but situated 10 miles away in the neighbouring city of Sunderland.
Once the attributes, attribute levels, and labels, were decided, an experimental
design was developed to determine the combination of attribute levels in each
alternative attribute bundle. A full factorial experimental design for the seven
attributes and levels in Table 1 would have provided 2n3n43n52 5 9600
1
For a discussion about advantages of SP over RP see Louviere et al. (2000).

Table 1
Attributes and levels
Variable Levels
Price (pounds) 7, 15, 20, 35

Reviews Poor (base)a
Average
Very good
Must-see
Word of mouth Non available (base)
Poor
Average
Very good
Must-see
Author Unknown (base)
Known
Type of play Comedy
Drama (base)
Experimental
Repertory classification Classic (base)
Modern
contemporary
Modern adaptation of a classic play
Venues Theatre Royal (reference)b
Northern Stage
Live Theatre
People’s theatre
Sunderland Empire
a
Base means that the other variables are introduced in the function using dummies and this one is expressed
by default with the value of the utility (i.e. the basic value would represent a classic drama without WOM,
poor reviews, unknown author and shown in Theatre Royal).
b
Venues are analysed in terms of an alternative specific constant. Since the model only works with differences
(only differences matter in utility), one of the alternatives is used arbitrary as the reference, in this case the
Theatre Royal.
combinations of alternatives. A full factorial design permits the main effect of

each attribute, as well as the effect of interactions between all attributes, to be
identified. However, since the focus of the study was on the main effect of each
attribute (the utility of each attribute irrespective of changes in other attribute
levels), a fractional factorial design was adopted.
A good fractional factorial design is one that minimises the variance of the
estimates, or conversely maximises the information in the data matrix. Other
properties are also of interest, such as orthogonality,2 and balance.3 The
experiment design adopted was an efficient design (see Rose and Bliemer, 2004).
This type of design aims to maximise the amount of information obtained from the
experiment through the maximisation of the Fisher information matrix (variance–
covariance matrix).4 Thus, levels of attributes selected, between alternative
2
Orthogonality occurs when all estimable effects are uncorrelated.
3
Balance occurs when each level occurs equally often within each factor or alternative.
4
The experimental design was developed using macros in Excel following Rose et al. (2008).

bundles, is that combination which produces most information for the model. This
produced 24 different choice alternatives which were paired to form 12 choice sets
from which respondents indicated their most preferred alternative.
In the current study, each respondent was presented with 12 different choice
sets. Research has shown that the precision of choice experiment estimates is
highest in the range of 6 to 13 choice situations (Caussade et al., 2005). Twelve
choice sets were thus chosen as a reasonable limit for the choice experiment.
A labelled experiment was chosen; that is, a choice set where each alternative was
labelled. This was done for purposes of realism, to set the theatrical production in
the context of one of the five most important theatres in the local area.
The 12 SP choice sets formed the core of the questionnaire. However, the
questionnaire also included some additional questions to ascertain the cultural
habits of the respondent; and also the socio-economic and demographic
characteristics of the respondent, such as age, gender, income and educational
level, that might be hypothesised to affect choice.
IV Data
A self-completion questionnaire was distributed to people attending the Northern
Stage theatre. It is often argued that SP surveys should be administered by
personal interview, because respondents are not usually familiar with discrete
choice experiment type questionnaires (Arrow et al., 1993). However, interviewer
surveys are expensive. A simple mail questionnaire, on the other hand, is the least
expensive survey method, but mail surveys typically have a lower response rate
(McDaniel and Gates, 2004). As a compromise it was decided to use a mixed
methodology with an interviewer handing questionnaires and motivating the
respondent by briefly explaining the purposes of the research and the question-
naire, which the respondent then self-completed and mailed back to the researcher.
In addition, a cash incentive5 was offered for completed questionnaires returned,
the terms and conditions of which were set out in a signed cover letter to the
questionnaire. This method, where an interviewer talks to a potential res-
pondent and convinces him or her to complete the questionnaire, results in a much
higher response rate than a passive mail survey at a notably lower cost than a face
to face interview. Moreover, the respondent can take the questionnaire home to
complete, allowing more time to think about responses. Giving respondents time to
think has been shown to produce more accurate and reliable results (Whittington
et al., 1992). The survey achieved a 55% response rate.
The survey commenced in November 2008, and covered a number of different
theatre productions, before ending with the Royal Shakespeare Company play
(Othello) in February 2009. Six hundred questionnaires were handed out to randomly
selected people attending performances at Northern Stage over this period, and 332
questionnaires were returned. Of the respondents, 70% were women, 77% graduates
or postgraduates, and 33% of respondents had a monthly income over d3000.
5
This was the chance to participate in a cash draw, with the first prize being d50 and two
other prizes of d25 each.

V Modelling
This section presents results from three models: first a MNL with socioeconomic
variables; second a MXL; and finally an IP estimation.
A MXL model provides two parameters: a mean and standard deviation for
each estimated parameter for the population. This type of model generates
random parameters that distribute among the population according to a
specified distribution, whereas IP estimates are obtained by conditioning these
random parameters on the individual’s observed choices. Thus, the former is
called an ‘unconditional’ distribution and the later a ‘conditional’ distribution
(Train, 2003; Hess, 2007).
V.1 MNL vs. MXL

Table 2 shows both the MNL and the MXL models. All the coefficients in both
models are statistically significant and have the correct ‘a priori’ expected sign.
What is remarkable in the results of both models is the extraordinary
importance of ‘Reviews’ and ‘word of mouth’ (WOM) in the determining the
demand for theatre productions. Both these attributes have the largest
parameters in the function along with the highest t-ratios.
The MNL model includes socioeconomic (SE) variables, and offers an
alternative (non-random) explanation of heterogeneity in preferences and choice
to the MXL model. These explanatory variables were: mature, women, culture,
family and income. Mature is a dummy that is introduced for respondents over
40 years of age. Women account for gender in the sample (women 5 1, and
0 5 otherwise); Culture represents those individuals with greater frequency of
cultural consumption along with higher formal education achievements. Family
refers to those who attended a family show when they were asked to take part in
the survey; and income contains two dummy variables: one for medium income
level and another for the highest income group. The MNL model reveals that
most of these variables are clearly significant. Thus, heterogeneity in preference
and choice reveals a number of systematic patterns. First, women seem to be less
interested than men in drama and comedy (e.g. for comedy a coefficient of
0.644–0.550 5 0.094); and do not trust WOM as much as men, particularly in its
extremes: the most negative and most positive popular reviews. Second, people
over 40 are keener on drama and comedy and seem to be more inclined to trust
reviews compared with younger audiences. Third, family show attendees do not
trust reviews and, especially WOM compared with other audiences. Fourth,
people with greater cultural capital prefer experimental plays more than other
individuals, and also show less dependence on WOM and reviews. This might
reflect a more independent assessment and a more educated taste required to
appreciate modern theatre.6 Fifth, there is a clear income effect observed in the
interaction with price, where more affluent people have a smaller cost coefficient
(i.e. 0.036210.0103 5 0.0259, for the middle income group).
6
A more detailed analysis of systematic heterogeneity of this work is explained in Grisolı́a
and Willis (2010).

Table 2
MNL and MXL models
Basic MNL Mixed Logit
Coefficient t-ratio Coefficient t-ratio
Theatre Royal 0.000 0

Northern Stage 0.105 1.83 0.0720 (1.21)
Live Theatre 0.466 7.61 0.511 ( 7.99)
People’s theatre 0.734 10.55 0.759 ( 10.58)
Sunderland Empire 0.750 11.30 0.760 ( 11.08)
Experimental-adaptation 0.282 2.18 0.208 (2.92)
Culture-experimental 0.283 2.89
Women-experimental 0.220 1.55
Comedy 0.644 5.21 0.148 (1.70)
Sd Comedy 0.705 ( 9.77)
Family-comedy 0.165 1.36
Women-comedy 0.550 4.06
Drama 0.449 2.88 0.321 (3.90)
Sd Drama 0.418 ( 4.24)
Culture-drama 0.305 3.04
Drama-mature 0.303 3.17
Family-drama 0.201 1.56
Women-drama 0.471 3.17
Price 0.0362 10.12 0.0309 ( 8.76)
Sd price 0.304 ( 3.48)
High income-price 0.0137 2.92
Middle income-price 0.0103 2.01
Reviews 1 ‘‘Average’’ 0.284 2.17 0.139 (1.76)
Reviews 1-culture 0.109 1.21
Reviews 1- family audience 0.513 3.59
Reviews2 ‘‘V. Good’’ 1.33 10.26 1.41 (17.19)
Reviews 2-women 0.111 1.13
Reviews 2-family 0.375 2.49
Reviews 2-mature 0.356 3.80
Reviews3 ‘‘Must-see’’ 1.66 16.80 1.47 (18.93)
sd reviews3 0.304 ( 3.48)
Reviews3-culture 0.224 1.91
Reviews3-family 0.294 1.79
Reviews3-mature 0.150 1.36
Wom1 1.19 6.59 1.64 ( 11.89)
Sd wom1 0.824 (4.20)
Wom1- women 0.496 2.41
Wom1-family 0.340 1.61
Wom2 0.814 4.39 0.568 (6.42)
Wom2-culture 0.265 2.59
Wom2-women 0.219 1.30
Wom2-mature 0.190 1.36
Wom3 1.41 8.62 1.41 (17.08)
Sd wom3 0.207 ( 1.52)
Wom3-women 0.222 1.46

Table 2 (Continued )
Basic MNL Mixed Logit
Coefficient t-ratio Coefficient t-ratio
wom4 1.72 9.37 1.63 (17.61)

Sd wom4 0.219 ( 1.44)
Wom4-women 0.363 2.09
Writer known 0.0841 1.72 0.0570 (1.13)
Final log-likelihood 4614.908 4600.235
r2 0.207 0.210
Adjusted r2 0.200 0.206
N (pseudo-individuals) 3618 3618
N (Individuals) 302 302
Parameters 46 23
As expected the MXL model performs much better than MNL, as can been
seen from their log-likelihood values, in spite of the fact that the MNL model
has 46 parameters; whereas the MXL model has only 23 parameters. In
addition, Table 3 shows several tests that confirm this. These are Akaike and
Bayesian information criterion. In all cases, these statistics use the log-likelihood
weighted by number of individuals and parameters to check which model fits
better, which will be the one with the lowest value.
In the MXL model, the variation (standard deviation) of the population
parameters were statistically significant for comedy, drama, price, and reviews3
(‘must-see’) and for most of the levels of WOM particularly the first level
(‘poor’) which accounts for the largest variance. Normal distributions were set
for all these parameters. This result points to the fact that most of the
heterogeneity is associated with these variables.
Various reasons might be postulated for heterogeneity in these variables.
People may use WOM information in different ways. This is consistent with the
idea that, although WOM is usually more trusted information, some individuals
may have tastes different from ‘the average’ and therefore may not be so
influenced by this assessment; while some others may not be able to so readily
identify with this source of information. In contrast Reviews do not follow a
population distribution pattern except for the highest ‘must-see’ level. This
might reflect that the fact that attitude towards reviews varies less: the source of
information is clearly defined, the critic is supposedly an expert and everybody
knows where to find these reviews. Sometimes reviews by critics differ from
popular tastes and this may be perceived in the statistical significance of the
standard deviation of the ‘must-see’. In general it can be seen (in Table 2) that
for intermediate levels (Review 1 and Review 2, which represent ‘average’ and
‘very good’) and WOM2 (‘average’) there is less heterogeneity associated with
these situations: the coefficient of the standard deviation of these variables is not
statistically significant (and hence is not reported). This is in contrast to the
extreme of the scale (i.e. a critic’s review 3: ‘must see’) which might polarise
Table 3
Tests to discriminate between models
Statistic test MNL MXL
Akaike IC 9321.816 9246.47

Akaike IC3 9367.816 9269.47
Bayesian IC 9606.725 9388.925
Final likelihood 4614.91 4600.24
Parameters 46 23
attitudes between those who therefore would see the play and those who might
not, thus leading to heterogeneity in tastes.
The other significant random parameters were the type of show (drama and
comedy) and the price. It is worth noting the high degree of statistical
significance and also the large coefficient associated with the standard deviation
for comedy reflects the heterogeneity of tastes for this type of show, compared
with drama which has a much smaller standard deviation.
An important issue in most of models is the presence and frequency of
counterintuitive signs in some parameters, particularly for price. Some solutions
have been suggested to overcome this, such as specifying a lognormal
distribution to ensure the coefficient has the same sign for all individuals
(Train, 2003) but this option usually leads to estimation problems. Another
approach could be to use a triangular distribution which has become a more
common method (Campbell et al., 2010). In this study a negative sign is expected
for price and Wom1 (poor); and a positive sign for Wom3 and Wom4. It is not
clear, however, what the expected sign for drama and comedy should be, since
these attributes are dependent on subjective tastes. In case of ‘reviews’ we should
expect positive signs for ‘very good’ and ‘must see’.
V.2 Unconditional vs. conditional distribution

The choice experiment allowed each respondent to make repeated choices
between alternatives, across twelve different choice sets. Since the set of choices
made by each individual is known, this information can be used to condition the
MXL estimates to obtain IPs for each respondent. Recall that MXL estimates are
distinct from IP estimates, since MXL estimates are ‘unconditional’ whereas IP
estimates are ‘conditional’ on the individual’s previous choices. When previous
choices are known, prediction can be improved by mixing over the density of b’s
in the sub-population who have made the same choices as the individual.
In Table 4 the results for population parameter (unconditional) and the IP
(conditional) models are compared.7 Table 3 lists the population mean, standard
deviation and the 95% confidence intervals for both the unconditional (MXL)
7
It should be noticed that unconditional estimates (MXL) in Table 4 have been done using
the whole sample of 336 individuals rather than the 302 in Table 2 which were reduce due to the
fact that some individuals did not provide socio-economic (SE) information and, for
comparison purposes, it was necessary to reduce these observations for a first estimation of
the MXL model.

Table 4
Comparson of results from the population means and the individual parameters models
Wom3 Wom4
Wom1 very must
Comedy Drama Reviews3 Price poor good see
Unconditional mean
Mean 0.112 0.304 1.48 0.0297 1.67 1.41 1.6
SD 0.727 0.404 0.299 0.0365 0.857 0.28 0.261
Prob (o0)% 45.5 22.1 0 20.10 98.00 0 0
Prob (40)% 54.5 77.9 100 79.90 2.00 100 100
Lower 1.329 0.473 0.926 3.288 0.848 1.103 0.103
Upper 1.520 1.101 2.076 0.026 1.964 2.104 0.042
Conditional means
Mean 0.125 0.325 1.430 0.029 1.588 1.413 1.608
SD 0.485 0.103 0.043 0.025 0.294 0.031 0.045
Min 0.9257 0.09223 1.307 0.1026 1.945 1.326 1.498
Max 1.771 0.5942 1.541 0.02122 0.3121 1.5 1.771
Perc (o0)% 59.00 0 0 10.42 100 100 100
Perc (40)% 41.00 100 100 89.58 0 0 0
Lower 0.826 0.123 1.346 2.165 1.353 1.519 0.078
Upper 1.076 0.527 1.515 1.012 1.473 1.697 0.019
and conditional (individuals-based parameter) distribution estimates. IP

estimates were obtained from those statistically significant random parameters
in the MXL model (Price, Comedy, Drama, Reviews3, Wom1, Wom3, Wom4).8 It
is worth noting the remarkable improvement in the goodness-of-fit for the
conditional model, with the likelihood rising to 4718.48. This might be
expected, since with more choice situations over which to condition the
parameters, a larger share of the variance in b’s is captured over theatre-goers.
Note that the mean of the IP distribution (conditional means) and the one from
the population distribution (unconditional mean) are quite similar; this is a
condition for a correctly estimated model (Train, 2003).
Comparing the number and proportion of individuals with a wrong sign in
the sample will provide another insight of the advantages of using conditional
estimates. With IP estimates it is straightforward to calculate the number and
proportion of individuals with a wrong sign in the sample. For the case of the
conditional distribution, percent of wrong signs are calculated using the mean of
the population and the standard deviation.
In doing so we observed a considerable improvement from the use of the
conditional distribution. Thus, the unconditional distribution leads to 19% of
wrong signs with respect to price and 2% with respect to Wom1; whereas in the
conditional distribution these figures drop to 10% and 0%, respectively.
Likewise ‘drama’ accounts for 0% negative parameters in the individual-based
estimates, compared with 22% in the case of population parameters, although
the negative sign for ‘drama’ cannot be considered wrong. Finally Comedy has a
8
Individual-based parameters where estimated using Winbugs (Lunn et al., 2000).

positive parameter with a probability of 45% in the case of population

distribution estimates, but this increases to 59% in the case of the IP estimates.
In terms of parameter intervals, it is clear that intervals narrow for all
coefficients in the case of the IP estimates. In addition, the conditional
parameter distribution has a lower standard deviation. Therefore, it can be
inferred that the conditional IP estimates are superior, with smaller variances,
more precise intervals and logical signs compared with the unconditional
population parameters. This outcome is consistent with previous findings in the
literature (Hensher et al., 2006; Hess, 2007).
Histograms for the parameters in Table 4 are shown in Figure 1. It is very
interesting to observe that only the ‘WOM-poor’ diverged from the general
normal distribution. This pattern of successive choices might express the fact that,
as discussed previously, a poor WOM review is diffuse because this information is
not always available, it is not clear who provides it (and therefore how much trust
can be placed in it), and such a negative assessment could be interpreted in
different ways. However, the effect of WOM-poor is clearly negative, but the
intensity of this negativity varies considerably following a non-structured pattern.
VI WTP
In its simplest formulation WTP for changes in one unit of an attribute (i.e. a
level of an attribute) is obtained as the ratio of the coefficient of this attribute, or
attribute level (l), and the price coefficient (p). This result is equivalent to the
compensating variation (Small and Rosen, 1981). Thus, the WTP for one unit of
attribute k, for a linear function, is
WTP ¼ bl =bp : ð10Þ
When interaction terms are included this formula is more complex. Formula
(10) provides a simple point estimate that is assumed to represent the whole
population, which may not be realistic. One way to overcome this issue is to
calculate confidence intervals. Unfortunately this task is not easy, as it is known
that the parameters in ratio (10) distribute asymptotically normal. The ratio of
two random normal variables is another random variable that distributes Cauchy
(Arnold and Brockett, 1992) which is unstable with undefined variance and
unknown mean. Thus, estimating a confidence interval can be problematic if only
a standard procedure is applied. There is, however, an alternative, namely to use
a formula suggested by Armstrong et al. (2001) which is easy to apply for point
estimations in the MNL since it is not necessary to know the WTP distribution.
In using MXL, calculations of WTP imply the added difficulty of working
with two parameters, the mean and the standard deviation. WTP can however
be estimated using simulation. It is known, however, that this will produce WTP
with an excessive variance (Hensher et al., 2006).
Finally, IPs estimates can be used to derive an individual’s WTP simply
taking the individual ratio of conditional mean of the parameter of interest and
the conditional mean of the price. This last method is not only simpler but also
provides accurate results, and it is the one adopted in this article.
Comedy Drama
40
60
50 30
Frequency
Frequency
40
30 20
20
10
10
0 0
0
0
00
50
00
50
00
00
10
20
30
40
50
60
.0
.5
0.
0.
1.
1.
2.
0.
0.
0.
0.
0.
0.
0.
–1
–0
WOM must see Price

60 40
50
30
Frequency
Frequency
40
30 20
20
10
10
0 0
40
50
60
70
80
–0 0
–0 8
–0 6
–0 4
0. 2
00
02
.1
.1
.0
.0
.0
.0
1.
1.
1.
1.
1.
0.
–0
–0
WOM very good WOM poor

40 100
80
Frequency
30
Frequency
60
20
40
10 20
0 0
30
35
40
45
50
00
00
00
.5
.5
1.
1.
1.
1.
1.
0.
–2
–1
–1
–0
Reviews must see

40
30
Frequency
20
10
0
30
35
40
45
50
55
1.
1.
1.
1.
1.
1.
Figure 1. Histograms for individual parameters.
Nevertheless, if the whole sample is taken, extremely large WTP and

extremely low (negative) WTP are obtained at both edges of the sample, which
seems unrealistic. This problem has been reported previously by Sillano and
Table 5
Willingness to pay for all theatre play attributes based on individual parametersa and MNL models
Comedy Drama Reviews3 Wom1 Wom3 Wom4
IP estimates
Mean (d per play) 4.83 8.33 38.56 43.15 38.05 43.33
Upper (d per play) 36.151 18.208 73.330 1.167 72.213 82.275
Lower (d per play) 26.491 1.548 3.790 85.133 3.887 4.385
MNL estimates
Mean (d per play) 17.79 12.40 45.86 32.87 38.95 47.51
Upper (d per play) 25.90 21.40 58.24 22.09 51.24 61.72
Lower (d per play) 10.89 4.05 37.01 46.31 29.18 36.33
a
Confidence interval for 95%.
Ortúzar (2005) who suggest considering whether or not these individuals give
due attention to the price attribute. Analysis of the data revealed that these
extreme cases corresponded with those observations that have the lowest
statistical significance for the price parameter, in some cases close to zero.9
To avoid the problem of a price coefficient close to zero generating infinite
moments, and to obtain a more reliable distribution, only those individuals were
selected who had a price coefficient which exceeded a statistically significance
threshold. It was decided to set the minimum as 75% significance; that is, a t-ratio
of 0.647. Proceeding in this way meant trimming the sample from 332 to 216
individuals. The WTP results are shown in Table 5, for both the IP and MNL
models. The IP model produces slightly lower estimates of mean WTP for comedy
and drama productions compared with the MNL model, although the results for
the effect of information (reviews and word of mouth) on WTP are quite similar.
Finally it is instructive to estimate the WTP for different types of production.
In doing so, several different attributes were selected to calculate this complex
ratio, since it is not only the type of production but also other attributes such as
whether the writer is known or unknown, the type of reviews and WOM about the
play, that affect WTP. A realistic assumption might be that theatre plays usually
have good reviews, from ‘very good’ to ‘must see’; that ‘word of mouth’ is not
usually available, and that ‘known’ authors are more frequently represented.
Therefore the scenario in Table 6 is for a ‘must-see’ play with a ‘known’ author
showing at the Theatre Royal. The WTP results presented in Table 6 are for the
three basic types of play, and are shown as histograms in Figure 2.
This type of analysis provides a better understanding of consumer tastes
which could be exploited for marketing purposes. For instance, the model can
clearly identify those shows which would command a higher price on the basis of
9
Daly et al. (2009) argue that estimating WTP from random parameters will produce infinite
moments. This is the result of values of cost coefficients being close to zero. They demonstrate
that the usual practise of applying triangular, lognormal, uniform or normal distributions will
not solve the problem. On the other hand they discard simulation (Espino et al., 2006) as a way
to overcome the problem and reject the ratio of individual parameters as another way to obtain
individual WTP. Nevertheless this later practise has been common in those few papers that
estimate individual WTP such as Hensher et al. (2006) and Hess (2007) and is adopted here.

Table 6
Willingness to pay for a play in Theatre Royal with a must-see reviews and known author
Drama Comedy Experimental
Mean (d per play) 63.21 59.71 60.17

SD 29.63 31.98 27.78
Upper (d per play) 121.28 122.39 114.61
Lower (d per play) 5.13 2.97 5.72
Drama Theatre Royal Comedy Theatre Royal

50 Mean =63.21 60 Mean =59.71
Std. Dev. =29.633 Std. Dev. =31.989
40 N =216 50 N =216
Frequency
Frequency
40
30
30
20
20
10 10
0 0
–1 00
–5 0
00
00
15 0
00
00
00
00
.0
.0
.0
.0
.
0.
0.
0.
0.
0.
0.
0.
50
00
50
00
00
10
10
20
–1
–2
–1
Experimental Theatre in
Theatre Royal
50 Mean =60.17
Std. Dev. =27.781
40 N =216
Frequency
30
20
10
0
–1 00
–5 0
00
00
15 0
00
.0
.0
0
.
0.
0.
0.
0.
50
00
50
10
–1
Figure 2. WTP distributions for some types of shows at the Theatre Royal.
their attributes, including reviews and WOM where the show had been running
say in London before going on tour. Drama can, on average, command a higher
ticket price than comedy. Also the price of a ticket could be increased by d38.56
on average (i.e. dividing the ‘must see’ coefficient by the price coefficient) for a
‘must-see’ play, compared with a play without a ‘review’. In general the impact
of ‘reviews’ is impressive, but even this information is subject to heterogeneity
(see Figure 1), with some individuals willing to pay more than the average and
some individuals willing to pay much less than the average.
VII Conclusions
IP estimation from discrete choice models applied to theatre production provides a
method which can be used to accurately estimate the value of different plays. The
fact that these estimations come from IPs allows the researcher to address
heterogeneity in the sample, overcoming the problems of interval estimation.
Unlike the use of systematic variation, the IPs estimation provides a specific
structure of tastes even in cases where the socioeconomic information is missing,
which can occur for a number of observations in questionnaire surveys where
respondents are reluctant to provide such information. In addition since the
conditional estimation is more precise and simpler than the one from mixed logit
it is also possible to select ex-post the observations based on their significance in
order to obtain a more realistic distributions of WTP for theatre. However, both
the IP and MNL models produce similar estimates of WTP for theatre
attributes, when a strict comparison is made between the two models.
The results of both models (IP and MNL) reveal that there is considerable
heterogeneity in preferences for the attributes of theatre productions, and in
theatre-goers WTP for tickets based on these attributes. These are factors which
theatre managers and producers of plays should consider in deciding which
plays, with attribute bundles, to stage; and in any strategy to maximise revenue.
This type of model has an enormous potential to detect differences and segments
among theatre-goers, that might justify greater differential pricing strategies; and to
assist theatre management to capture more theatre-goer consumer surplus. In
addition, the approach can assist in a better understanding the social value of
performing arts and how this varies by different types of show. A SP survey with IPs
estimation appears to be more precise and flexible than RP methods.
Acknowledgements
This work is supported by the Arts and Humanities Research Council; and the
Arts Council England [Grant: AHRC Fellowship in Economic Impact
Assessment of Arts and Humanities]. The authors would like to thank Mauricio
Sillano for his help with the WinBUGS code; and Juan de Dios Ortúzar, and an
anonymous referee, for their helpful advice and comments.
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Heterogeneity in willingness-to-pay for theatre productions: Individual

Article in Scottish Journal of Political Economy · July 2011

José María Grisolía Ken Willis

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Jose M. Grisolian and Ken Willisnn

theatrical productions on demand; and also to explore the degree of

A MXL is a more general model that overcomes restrictions of MNL (see,

Scottish Journal of Political Economy

The estimation processes for both models consists of maximising the

The conditional distribution in equation (9) can be replaced by equation (8)

Thus, the expected individual estimation parameter is

Scottish Journal of Political Economy

III Experimental Design

Scottish Journal of Political Economy

Price (pounds) 7, 15, 20, 35

combinations of alternatives. A full factorial design permits the main effect of

Scottish Journal of Political Economy

Scottish Journal of Political Economy

V.1 MNL vs. MXL

Scottish Journal of Political Economy

Basic MNL Mixed Logit

Coefﬁcient t-ratio Coefﬁcient t-ratio

Theatre Royal 0.000 0

Scottish Journal of Political Economy

Coefﬁcient t-ratio Coefﬁcient t-ratio

wom4 1.72 9.37 1.63 (17.61)

Statistic test MNL MXL

Akaike IC 9321.816 9246.47

V.2 Unconditional vs. conditional distribution

Scottish Journal of Political Economy

and conditional (individuals-based parameter) distribution estimates. IP

Scottish Journal of Political Economy

positive parameter with a probability of 45% in the case of population

WTP ¼ bl =bp : ð10Þ

WOM must see Price

WOM very good WOM poor

Reviews must see

Figure 1. Histograms for individual parameters.

Nevertheless, if the whole sample is taken, extremely large WTP and

Comedy Drama Reviews3 Wom1 Wom3 Wom4

Scottish Journal of Political Economy

Drama Comedy Experimental

Mean (d per play) 63.21 59.71 60.17

Drama Theatre Royal Comedy Theatre Royal

Scottish Journal of Political Economy

Date of receipt of ﬁnal manuscript: 22 September 2010

Scottish Journal of Political Economy

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