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Flexible valuations for consumer goods as measured by the Becker-DeGroot-Marschak mechanism

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  • Glimcher, Paul
  • Tymula, Agnieszka
  • Woelbert, Eva

Abstract

Economists have long been interested in mechanisms that lead to truthful revelation of the relative values individuals place on diff erent goods. In this paper we take one of the most popular of such mechanisms, and show that valuations obtained using the Becker-DeGroot-Marschak (BDM) procedure depend on the distribution of prices presented to subjects when the mechanism is implemented. We show that this eff ect of price distribution occurs quite frequently, significantly impacts reported valuations, and that it is unlikely to be caused by misconceptions about BDM. This eff ect is the largest when pricing distributions show a large peak just above or just below an individual's average valuation of the good being considered. We also show that a simple non-incentive compatible subject rating of the desirability of goods can be used to predict the likelihood that pricing distributions will influence BDM valuations. Valuations for goods subjects report that they most want to purchase are most likely to be influenced by distributional structure. Our results challenge some of the dominant theoretical models of how BDM-like valuation procedures relate to standard notions of utility.

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File URL: http://hdl.handle.net/2123/9732
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Bibliographic Info

Paper provided by University of Sydney, School of Economics in its series Working Papers with number 2013-20.

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Date of creation: Nov 2013
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Handle: RePEc:syd:wpaper:2123/9732

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Keywords: valuation; reference; utility;

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  1. Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  2. Dan Ariely & George Loewenstein & Drazen Prelec, 2003. ""Coherent Arbitrariness": Stable Demand Curves Without Stable Preferences," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 73-105, February.
  3. Drew Fudenberg & David K. Levine & Zacharias Maniadis, 2012. "On the Robustness of Anchoring Effects in WTP and WTA Experiments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 131-45, May.
  4. E. Elisabet RutstrÃm, 1998. "Home-grown values and incentive compatible auction design," International Journal of Game Theory, Springer, vol. 27(3), pages 427-441.
  5. John List & Craig Gallet, 2001. "What Experimental Protocol Influence Disparities Between Actual and Hypothetical Stated Values?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 20(3), pages 241-254, November.
  6. Bohm, Peter & Linden, Johan & Sonnegard, Joakim, 1997. "Eliciting Reservation Prices: Becker-DeGroot-Marschak Mechanisms vs. Markets," Economic Journal, Royal Economic Society, vol. 107(443), pages 1079-89, July.
  7. Horowitz, John K., 2006. "The Becker-DeGroot-Marschak mechanism is not necessarily incentive compatible, even for non-random goods," Economics Letters, Elsevier, vol. 93(1), pages 6-11, October.
  8. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  9. 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.
  10. Shogren, Jason F. & Cho, Sungwon & Koo, Cannon & List, John & Park, Changwon & Polo, Pablo & Wilhelmi, Robert, 2001. "Auction mechanisms and the measurement of WTP and WTA," Resource and Energy Economics, Elsevier, vol. 23(2), pages 97-109, April.
  11. Lusk Jayson L & Alexander Corinne & Rousu Matthew C., 2007. "Designing Experimental Auctions for Marketing Research: The Effect of Values, Distributions, and Mechanisms on Incentives for Truthful Bidding," Review of Marketing Science, De Gruyter, vol. 5(1), pages 1-32, October.
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