Exploring customer heterogeneity with a scale‐extended latent class choice model: Experimental evidence drawn from urban water users

Abstract

The search for improved water pricing is central to urban water reform in many countries. Establishing efficient water prices is notoriously difficult, not least because different customers have different demands for water and yet they are presently faced with a one‐size‐fits‐all approach to pricing and service. This is especially challenging where water availability fluctuates widely, as is the case in many parts of Australia, because the impacts of exposure to episodic periods of scarcity can differ markedly. There is now substantial interest in the notion of ‘unbundling’ the water product to provide a better fit between customers' preferences and the level of service received. Following this trend, this study provides important insights into householders' willingness to pay for a range of flexible water options using a choice experiment. The paper reports a relatively underemployed extension to the latent class modelling framework to investigate preference heterogeneity towards urban water products, including purchasing services that involve the provision of environmental and amenity outcomes. The work adds to studies that use choice data to reveal heterogeneity while improving our understanding of household customers' demands. Overall, it also brings into focus questions about the future management of water in urban contexts.