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WTP and WTA in competitive and non-competitive environments

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  • Shahrabani, Shosh
  • Benzion, Uri
  • Shavit, Tal

Abstract

Theoretical equivalence exists among various auction mechanisms, specifically the Second-Price-Auction (SPA), a competitive environment, and the BDM mechanism, a non-competitive environment. Yet, empirical studies suggest that behavior in these mechanisms may diverge. Our experimental study examines the WTP and the WTA of individuals by analyzing buying and selling bidding patterns both for a physical product (mugs) and for two types of lotteries (regular lotteries and extreme lotteries) in these two auctions mechanism: SPA and BDM. We found that the WTP in the SPA is higher than the WTP in the BDM for mugs and for regular lotteries, while the mechanisms do not differ significantly for extreme lotteries. In addition, the WTA in the SPA is lower than in the BDM for regular lotteries only. These results indicate that the WTP and WTA, as well as the WTA-WTP gap, tend to differ in the SPA and in the BDM as a result of the interaction between the competitiveness effect and other psychological effects on bidding patterns for riskless and risky assets. In addition, the current study suggests that the competitiveness effect depends not only on the type of mechanism (SPA), but also on the type of item (physical assets or lotteries) and the type of lottery. In addition, the influence of the competitiveness effect may vary between buying and selling positions.

Suggested Citation

  • Shahrabani, Shosh & Benzion, Uri & Shavit, Tal, 2008. "WTP and WTA in competitive and non-competitive environments," Judgment and Decision Making, Cambridge University Press, vol. 3(2), pages 153-161, February.
    • Handle: RePEc:cup:judgdm:v:3:y:2008:i:2:p:153-161_3
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