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Laboratory Testbeds and Nonmarket Valuation: The Case of Bidding Behavior in a Second Price Auction with an Outside Option

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  • Todd L. Cherry
  • Peter Frykblom
  • John List
  • Jason Shogren
  • Melonie Williams

Abstract

Researchers now use the lab to examine the behavioral underpinnings of valuation before the field application which some argue has less experimental control. But lab valuation work raises its own set of concerns when it uses private goods to explore non-market valuation behavior because private goods have substitutes often unaccounted for in the lab. Therefore, the lab as a tool to testbed field valuation work may be limited. Herein we design an induced valuation experiment to explore bidding behavior in a second-price auction with an outside option that is a perfect substitute for the auction commodity. Theory predicts that rational bidders will consider the prices of outside options when formulating bidding strategies, and will reduce their bids whenever their resale value exceeds the price of the outside option. Our results suggest that bidders account for outside options when formulating bids with behavior following comparative static predictions. In addition, we provide evidence concerning hypothetical versus actual behavior with induced values – the data suggesting a hypothetical bias in the level of bids but not in bid shaving. Copyright Kluwer Academic Publishers 2004

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Bibliographic Info

Paper provided by Department of Economics, Appalachian State University in its series Working Papers with number 02-13.

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Date of creation: 2002
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Publication status: published in Environmental and Resource Economics
Handle: RePEc:apl:wpaper:02-13

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Web page: http://www.business.appstate.edu/departments/economics/
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  1. Elizabeth Hoffman & Dale J. Menkhaus & Dipankar Chakravarti & Ray A. Field & Glen D. Whipple, 1993. "Using Laboratory Experimental Auctions in Marketing Research: A Case Study of New Packaging for Fresh Beef," Marketing Science, INFORMS, vol. 12(3), pages 318-338.
  2. Roosen, Jutta & Fox, John A. & Hennessy, David A. & Schreiber, Alan, 1998. "Consumers' Valuation Of Insecticide Use Restrictions: An Application To Apples," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(02), December.
  3. Fox, John A. & Hayes, Dermot J. & Kliebenstein, James & Shogren, Jason F., 1994. "Consumer Acceptability of Milk from Cows Treated with Bovine Somatotropin," Staff General Research Papers 702, Iowa State University, Department of Economics.
  4. Shogren, Jason F. & Seung Y. Shin & Dermot J. Hayes & James B. Kliebenstein, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," American Economic Review, American Economic Association, vol. 84(1), pages 255-70, March.
  5. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  6. Frykblom, Peter, 1997. "Hypothetical Question Modes and Real Willingness to Pay," Journal of Environmental Economics and Management, Elsevier, vol. 34(3), pages 275-287, November.
  7. Harrison, Glen W. & Ronald M. Harstad & E. Elisabet Rutström, 1995. "Experimental Methods and Elicitation of Values," Discussion Paper Serie B 349, University of Bonn, Germany.
  8. Fox, John A. & Shogren, J. & Hayes, Dermot J. & Kliebenstein, James, 2003. "Cvm-X: Calibrating Contingent Values with Experimental Auction Markets," Staff General Research Papers 11935, Iowa State University, Department of Economics.
  9. Helen R. Neill & Ronald G. Cummings & Philip T. Ganderton & Glenn W. Harrison & Thomas McGuckin, 1994. "Hypothetical Surveys and Real Economic Commitments," Land Economics, University of Wisconsin Press, vol. 70(2), pages 145-154.
  10. Shogren, Jason F. & Crocker, Thomas D., 1991. "Risk, Self-Protection, and Ex Ante Economic Value," Staff General Research Papers 334, Iowa State University, Department of Economics.
  11. Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, vol. 35(3), pages 270-284, March.
  12. Cherry, Todd L. & Crocker, Thomas D. & Shogren, Jason F., 2003. "Rationality spillovers," Journal of Environmental Economics and Management, Elsevier, vol. 45(1), pages 63-84, January.
  13. Maribeth Coller & Melonie Williams, 1999. "Eliciting Individual Discount Rates," Experimental Economics, Springer, vol. 2(2), pages 107-127, December.
  14. Harrison, Glenn W, 1992. "Theory and Misbehavior of First-Price Auctions: Reply," American Economic Review, American Economic Association, vol. 82(5), pages 1426-43, December.
  15. Fox, John A. & Buhr, Brian L. & Shogren, Jason F. & Kliebenstein, James & Hayes, Dermot J., 1995. "Comparison of Preferences for Pork Sandwiches Produced from Animals With and Without Somatotropin Administration (A)," Staff General Research Papers 852, Iowa State University, Department of Economics.
  16. Cummings, Ronald G & Harrison, Glenn W & Rutstrom, E Elisabet, 1995. "Homegrown Values and Hypothetical Surveys: Is the Dichotomous Choice Approach Incentive-Compatible?," American Economic Review, American Economic Association, vol. 85(1), pages 260-66, March.
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