Designing Products and Services for Consumer Welfare: Theoretical and Empirical Issues

We examine the theoretical and empirical issues that arise for apublic-sector decision maker who wishes to use the target population's preferences as an imput for designing new products and services. The marketin gliterature suggests using essentially the same approach as that for the private-sector problem, with one exception. Instead of maximizing profit, share or volume, the sum of benefits to a society is maximized. However, the social welfare literature has suggestes several other measures of welfare abd shows that no single welfare function dominates all others. Therefore, to choose an appopriate welfare function, the decision maker must first examine the theoretical and empirical similarities and differences among the methods. We examine these for six prominent welfare functions in terms of the notion of fairness promoted and the kinds of preference data required. Empirically, we examine the similarities in the social rankings and first choices induced by these welfare functions under various preference configurations. We also examine their sensitivity to measurement error and preference normalization.