I once asked a friend how much he’d be willing to pay to have the (very good) television series Firefly revived and continued for one season. He said $30, reasoning that this is roughly the price for a TV series on DVD. It was an interesting response, because the price I thought I’d be willing to pay was at least an order of magnitude higher–I was thinking somewhere between $300-$1000.
I suspect this rather large difference in willingness to pay stemmed neither from me being wealthier nor from my liking the show more. Rather, we were just thinking about the question differently. I was trying to assess my reservation price–the point at which I would be indifferent between buying and not buying the product. My friend was giving the price point that he would expect a store to charge. The difference between our two prices is consumer surplus. Like my friend, I expect that were Firefly extended and sold as DVD boxed sets in stores, its price probably would be $30. That’s what I’d expect to pay. However, I’d actually be willing to pay a whole lot more. As would, I suspect, my friend.
Thinking in terms of reservation price has two benefits. First, it provides a more accurate estimate of wealth. My Netflix membership might cost $240 per year, but the value I derive from it is significantly higher, since it allows me to discover and view gems like Firefly. The same applies to my refrigerator (rented), facebook, and other goods–their price does not capture their value. Second, recognizing that products often have far more value to their customers than the going price would indicate may open up new potential business models. If Firefly season two can become profitable when X people buy it for $30, it can also become profitable when X/10 people buy it for $300. At a time when the accelerated communication technologies are disrupting everything, these insights may prove valuable.