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Are the Vickrey Auction and the BDM Mechanism Really Incentive Compatible? - Empirical Results and Optimal Bidding Strategies in Cases of Uncertain Willingness-to-pay

Author

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  • Klaus Peter Kaas
  • Heidrun Ruprecht

Abstract

Willingness-to-pay (WTP) data elicited with the help of incentive compatible methods like the Vickrey auction and the BDM mechanism promise higher validity than stated preferences data and provide more information content than do revealed-preferences data. However, research shows that subjects in a Vickrey auction do not always follow the dominant strategy of bidding their WTP, but frequently bid too high or too low. Although this phenomenon is usually attributed to irrational behavior, that need not be the only explanation. In marketing research applications, subjects are typically asked their WTP for a new product, and it appears that most subjects are uncertain about their exact WTP. We present a modified bidding model to explain that in this case, it is optimal for risk-averse but rational bidders to underestimate, rather than to overestimate, their WTP. The model is supported by preliminary experimental data.

Suggested Citation

  • Klaus Peter Kaas & Heidrun Ruprecht, 2006. "Are the Vickrey Auction and the BDM Mechanism Really Incentive Compatible? - Empirical Results and Optimal Bidding Strategies in Cases of Uncertain Willingness-to-pay," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 58(1), pages 37-55, January.
    • Handle: RePEc:sbr:abstra:v:58:y:2006:i:1:p:37-55
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    Citations

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    Cited by:

    1. A. Banerji & Jeevant Rampal, 2020. "Reverse Endowment Effect for a New Product," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 786-805, May.
    2. Oben K Bayrak & Bengt Kriström, 2016. "Is there a valuation gap? The case of interval valuations," Economics Bulletin, AccessEcon, vol. 36(1), pages 218-236.
    3. Robert Lensink & Tom Raster & Angelique Timmer, 2018. "Liquidity Constraints and Willingness to Pay for Solar Lamps and Water Filters in Jakarta," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 30(4), pages 577-587, September.
    4. Xinyu Cao & Juanjuan Zhang, 2021. "Preference Learning and Demand Forecast," Marketing Science, INFORMS, vol. 40(1), pages 62-79, January.
    5. Glimcher, Paul & Tymula, Agnieszka & Woelbert, Eva, 2013. "Flexible valuations for consumer goods as measured by the Becker-DeGroot-Marschak mechanism," Working Papers 2013-20, University of Sydney, School of Economics.
    6. Sebastian Lehmann, 2014. "Toward an Understanding of the BDM: Predictive Validity, Gambling Effects, and Risk Attitude," FEMM Working Papers 150001, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    7. Marine Le Gall-Ely, 2009. "Définition, mesure et déterminants du consentement à payer du consommateur : synthèse critique et voies de recherche," Post-Print hal-00522826, HAL.

    More about this item

    Keywords

    BDM-mechanism; Discriminal Dispersion; Incentive Compatibility; Vickrey Auction; Willingness-to-pay;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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