WTP and WTA in a competitive environment

WTP and WTA in a WTP and WTA in a competitive environmentcompetitive environment

Shosh ShahrabaniShosh Shahrabani11 , Tal Shavit , Tal Shavit22, Uri Benzion, Uri Benzion1,31,3

1.1. The Max Stern Academic College of Emek Yezreel,The Max Stern Academic College of Emek Yezreel, IsraelIsrael2.2. College of Management and The Open University of Israel. College of Management and The Open University of Israel.

ESA- World Meeting June 2007 ESA- World Meeting June 2007 at LUISS ,in Roma, Italyat LUISS ,in Roma, Italy

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OutlinesOutlines

BackgroundBackground ObjectivesObjectives MethodsMethods ResultsResults Summary & ConclusionsSummary & Conclusions

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BackgroundBackground

Experimental results have found that Experimental results have found that

the WTPthe WTP (Willingness- To- Pay) (Willingness- To- Pay) is loweris lower than than

the WTAthe WTA (Willingness- To- Accept) in different (Willingness- To- Accept) in different

states and for different commodities. states and for different commodities.

This difference has been explained by a number This difference has been explained by a number

of psychological effects, among them of psychological effects, among them loss loss

aversionaversion, and the , and the endowment effect. endowment effect.

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Background (cont.)Background (cont.)

However, recent studies have questioned However, recent studies have questioned

the existence and interpretation of a the existence and interpretation of a

possible gap between WTP and WTA possible gap between WTP and WTA (Shogren et al., 2001; Plott and Zeiler, 2005; Horowitz (Shogren et al., 2001; Plott and Zeiler, 2005; Horowitz

and McConnell, 2002)and McConnell, 2002)

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Background (cont.)Background (cont.)

In addition, several studies have In addition, several studies have

compared the bidding patterns of subjects compared the bidding patterns of subjects

in different auction mechanisms. in different auction mechanisms.

Despite the theoretical equivalence among Despite the theoretical equivalence among

the various auction mechanisms, it was the various auction mechanisms, it was

found that behavior in these mechanisms found that behavior in these mechanisms

may diverge (Lusk et al. 2004) may diverge (Lusk et al. 2004)

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ObjectivesObjectives The purpose of the current study is to examine the WTP and The purpose of the current study is to examine the WTP and

the WTA of individuals by analyzing buying and selling the WTA of individuals by analyzing buying and selling

bidding patterns for both physical product bidding patterns for both physical product (mugs)(mugs) and and

monetary assets monetary assets (lotteries)(lotteries) in two separate auctions in two separate auctions

mechanism:mechanism:

1.1. The Second- Price-AuctionThe Second- Price-Auction, (, (SPA) SPA) (Vickery, 1961), (Vickery, 1961),

which is an example of a which is an example of a competitive environmentcompetitive environment since since

subjects compete against each other to win the auction,subjects compete against each other to win the auction,

2.2. The BDM mechanism- The BDM mechanism- (Becker-DeGroot-Marschak(Becker-DeGroot-Marschak, 1964) , 1964)

which is an example of which is an example of a non-competitive environmenta non-competitive environment, since it , since it

is a random number auction (selected by the computer). is a random number auction (selected by the computer).

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HypothesesHypotheses

We expect to find different bidding patterns for individuals in We expect to find different bidding patterns for individuals in competitive versus non-competitive auctions, since competitive versus non-competitive auctions, since individuals may be influenced by:individuals may be influenced by:

The “Win-Loving” effectThe “Win-Loving” effect, or the “top-dog” effect (Cherry et , or the “top-dog” effect (Cherry et al. 2004, Corrigan & Rousu ,2003) which reflects the al. 2004, Corrigan & Rousu ,2003) which reflects the extra pleasure gained from winning itself (especially extra pleasure gained from winning itself (especially relevant in a competitive environment such as the SPA) . relevant in a competitive environment such as the SPA) .

In addition, we expect that:In addition, we expect that:

the WTA-WTP disparitythe WTA-WTP disparity in a in a competitive auctioncompetitive auction will be will be lowerlower than the WTA-WTP disparity in a than the WTA-WTP disparity in a non-competitive non-competitive auctionauction,, since win-loving may affect both WTP and WTA in since win-loving may affect both WTP and WTA in competitive auctions. competitive auctions.

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Experimental procedureExperimental procedure

The participants in the experiment were 95 students at The participants in the experiment were 95 students at Ben-Gurion University, who were divided into two groupsBen-Gurion University, who were divided into two groups

SPA group- SPA group- 52 students were asked to bid prices in a 52 students were asked to bid prices in a second-price-auctionsecond-price-auction

BDM group- BDM group- 43 students were asked to bid prices for 43 students were asked to bid prices for the same assets in the BDM mechanism.the same assets in the BDM mechanism.

Participants were asked to bid prices for buying and Participants were asked to bid prices for buying and selling mugs and for several different lotteries. selling mugs and for several different lotteries.

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Instructions to subjectsInstructions to subjectsInstructions to the SPA groupInstructions to the SPA group, , In the case of a buying (selling) auction, the person with the In the case of a buying (selling) auction, the person with the highest highest

bidding price( bidding price( lowest lowest asking) will win the auction, but will pay the asking) will win the auction, but will pay the second highestsecond highest bidding ( bidding (lowestlowest asking) price in the group asking) price in the group participating in the auction. participating in the auction.

Instructions to the BDM groupInstructions to the BDM group,, For each asset, a number between the low value and high value For each asset, a number between the low value and high value

would be randomly selected by the computer. would be randomly selected by the computer. in the case of a buying auction, if the bidding price is above the in the case of a buying auction, if the bidding price is above the

random number, the bidder will pay the random number and get random number, the bidder will pay the random number and get the lottery.the lottery.

However, if the bidding price is below the random number, the However, if the bidding price is below the random number, the bidder will not get the lottery and will remain with the initial bidder will not get the lottery and will remain with the initial endowment.endowment.

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Description of the AuctionsDescription of the Auctions

Two parts auctions:Two parts auctions:

Mugs’ auctions:Mugs’ auctions: The auctions in the first part The auctions in the first part were for black and gray mugs. The mug auction were for black and gray mugs. The mug auction offered only one of the mugs (to buy or to sell). offered only one of the mugs (to buy or to sell).

Lotteries auctions:Lotteries auctions: The auctions in the second The auctions in the second part were for six lotteries presented in Table 1. part were for six lotteries presented in Table 1.

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Table 1aTable 1aLotteries AuctionsLotteries Auctions

ProbabilityProbability 50%50% 40%40%10%10%Expected Expected ValueValue

Lottery ALottery A200200404000116116

Lottery BLottery B20020040401010117117

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Table 1bTable 1b Lotteries Auctions Lotteries Auctions


Lottery CLottery C20201010001515

Lottery DLottery D202010105515.515.5

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Table 1cTable 1c Lotteries Auctions Lotteries Auctions


Lottery ELottery E10001000202055113.5113.5

Lottery FLottery F10001000202000113113

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ResultsResults

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Table 3: Average bidding prices for mugs Table 3: Average bidding prices for mugs in SPA and BDMin SPA and BDM

WTPWTP

))buying positionbuying position((

WTAWTA

))selling positionselling position((

SPASPA BDMBDMT-testT-test

))p-valuep-value((SPA to SPA to BDMBDM



Black Black MugMug

9.089.08 5.575.57 5.935.93 ))0.000.00 ( (

6.276.27 5.715.71 1.021.02 ))0.160.16 ( (

Gray Gray MugMug

7.387.38 5.125.12 3.83.8

))0.000.00 ( (

5.425.42 5.485.48 0.120.12 ))0.450.45 ( (

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Table 4: Average bidding prices for lotteries in Table 4: Average bidding prices for lotteries in SPA to BDMSPA to BDM

WTPWTPWTAWTA





Lottery Lottery AA

92.5592.55 77.8977.89 1.681.68 ))0.050.05((

88.7088.70 99.4299.42 1.491.49

) ) 0.070.07((

Lottery Lottery BB

95.7795.7776.7776.77 2.052.05 ))0.020.02((

86.2586.25 96.1696.16 1.201.20

))0.120.12((

Lottery Lottery CC

12.6712.6710.9810.98 1.651.65 ))0.050.05((

12.1312.13 13.0413.04 1.001.00

))0.160.16((

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Results 1Results 1 WTP- buying auctionsWTP- buying auctions

For both mugs and lotteries in the buying For both mugs and lotteries in the buying

auctions (WTP):auctions (WTP):

The WTP for an asset in a The WTP for an asset in a competitive auction competitive auction

(SPA)(SPA) is is higherhigher than the WTP for the same than the WTP for the same

asset in a asset in a non-competitive auction (BDM). non-competitive auction (BDM).

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Results 2Results 2WTA- selling auctionsWTA- selling auctions

For mugs and for most lotteries in the selling For mugs and for most lotteries in the selling

auctions (WTA): auctions (WTA):

The average selling prices in the The average selling prices in the SPA groupSPA group

were not significantly differentwere not significantly different from the average from the average

selling prices in the selling prices in the BDM groupBDM group..

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Results 3Results 3 WTA-WTP disparityWTA-WTP disparity

Table 5 presents the average WTA-WTP Table 5 presents the average WTA-WTP disparity for the mug auction,disparity for the mug auction,

and compare this disparity between the and compare this disparity between the two groups SPA and BDMtwo groups SPA and BDM

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Table 5: WTA-WTP disparityTable 5: WTA-WTP disparity in each mug auction in each mug auction

WTA-WTPWTA-WTP


))p-valuep-value((SPA to BDMSPA to BDM

Black MugBlack Mug--2.812.81++ 0.140.14 4.714.71( ( 0.000.00))

Gray MugGray Mug--1.961.96++ 0.360.36 3.463.46( ( 0.000.00))

+ p-value < 0.05; for the null hypothesis the average value + p-value < 0.05; for the null hypothesis the average value equals zero.equals zero.

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Results of Mugs’ AuctionsResults of Mugs’ Auctions

The average WTA-WTP gapThe average WTA-WTP gap in the SPA is in the SPA is significantly lowersignificantly lower than than

the average WTA-WTP gap in the BDM.the average WTA-WTP gap in the BDM.

In the SPAIn the SPA, the WTA-WTP disparity is significantly , the WTA-WTP disparity is significantly negativenegative (Table (Table

5). This indicates that in the competitive environment of the SPA, 5). This indicates that in the competitive environment of the SPA,

WTP > WTAWTP > WTA, which is the , which is the opposite of the endowment effect. opposite of the endowment effect.

One possible explanation is that the One possible explanation is that the win-loving effectwin-loving effect in the in the

buying positionbuying position is more dominant than is more dominant than the endowment effectthe endowment effect in in

the selling position; therefore, the bidding price for buying is higher the selling position; therefore, the bidding price for buying is higher

than the selling bidding price for the same product.than the selling bidding price for the same product.

In the BDM auctionIn the BDM auction, however, we did not find any significant , however, we did not find any significant

difference between WTA and WTP (meaning WTP = WTA).difference between WTA and WTP (meaning WTP = WTA).

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Table 6: WTA-WTP disparity Table 6: WTA-WTP disparity

in each lottery auctionin each lottery auction WTA-WTPWTA-WTP


))p-valuep-value((SPA to BDMSPA to BDM

Lottery ALottery A --3.853.85 21.5321.53++ 2.42.4( ( 0.010.01))

Lottery BLottery B--7.487.48 19.3919.39++ 2.42.4( ( 0.010.01))

Lottery DLottery D0.510.51 3.583.58++ 2.342.34( ( 0.010.01))

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Results for Lotteries’ auctionsResults for Lotteries’ auctions

The WTA-WTP disparityThe WTA-WTP disparity in the SPA (a competitive auction) is in the SPA (a competitive auction) is

lowerlower than the average WTA-WTP gap in the BDM (a non- than the average WTA-WTP gap in the BDM (a non-

competitive auction), except for lotteries with low probability for high competitive auction), except for lotteries with low probability for high

value. value.

The WTA-WTP disparity does not differ significantly from zero in the The WTA-WTP disparity does not differ significantly from zero in the

SPA (i.e., WTP = WTA) (except for lotteries E and F), while for the SPA (i.e., WTP = WTA) (except for lotteries E and F), while for the

BDM mechanism this gap is BDM mechanism this gap is significantly positivesignificantly positive (WTP < WTA). (WTP < WTA).

A possible explanation for this result is that for lotteries, the A possible explanation for this result is that for lotteries, the

endowment effectendowment effect in the selling position offsets the in the selling position offsets the win-loving effectwin-loving effect

in the buying position of the SPA competitive environment. Hence, in the buying position of the SPA competitive environment. Hence,

the WTA does not differ from the WTP. the WTA does not differ from the WTP.

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ConclusionsConclusions The experimental results show that the competitive The experimental results show that the competitive

environment affects only the environment affects only the buying pricesbuying prices and not the selling and not the selling

prices.prices.

It seems that in the selling position, participants are strongly It seems that in the selling position, participants are strongly

affected by the endowment effect, which cancels the impact of affected by the endowment effect, which cancels the impact of

the competitive environment. the competitive environment.

In addition, the WTA-WTP disparity is lower in the competitive In addition, the WTA-WTP disparity is lower in the competitive

auction than in the noncompetitive auction. auction than in the noncompetitive auction.

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Conclusions (cont.)Conclusions (cont.)

Our conclusion is that the WTA and WTP are Our conclusion is that the WTA and WTP are

affected by behavioral effects such as the affected by behavioral effects such as the

endowment effect and the win-loving effect. endowment effect and the win-loving effect.

Moreover, WTA and WTP depend on whether Moreover, WTA and WTP depend on whether

the product is a real product (such as mugs) or a the product is a real product (such as mugs) or a

monetary value (as in lotteries), as well as on monetary value (as in lotteries), as well as on

the structure of the lottery.the structure of the lottery.

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Conclusions (cont.)Conclusions (cont.)

Finally, the results of this paper have important Finally, the results of this paper have important

implications for the relevance of the results and implications for the relevance of the results and

conclusions of many previous works that used conclusions of many previous works that used

second-price-auction to determine the value of second-price-auction to determine the value of

an asset, to classify subjects according to their an asset, to classify subjects according to their

risk attitude or to measure the WTA-WTP gap. risk attitude or to measure the WTA-WTP gap.

WTP and WTA in a competitive environment

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