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Designing Experimental Auctions For Marketing Research: Effect Of Values, Distributions, And Mechanisms On Incentives For Truthful Bidding

Author

Listed:
  • Lusk, Jayson L.
  • Alexander, Corinne E.
  • Rousu, Matthew C.

Abstract

Accurately estimating consumer demand for new products is an arduous task made even more difficult by the fact that individuals tend to overstate the amount they are willing to pay for new goods when asked hypothetical questions. Despite their appeal in eliminating hypothetical bias, marketers have been slow to adopt experimental auctions as a standard tool in pre-test market research. One issue that has slowed adoption of the methodology is the proliferation of auction mechanisms and the lack of clear guidance in choosing between mechanisms. In this paper, we provide insight into the theoretical properties of two incentive compatible value elicitation mechanisms, the BDM and Vickrey 2nd price auction, such that practitioners can make more informed decisions in designing experimental auctions to determine consumer willingness-to-pay. In particular, we draw attention to the shapes of the payoff functions and show in a simulation that the two mechanisms differ with respect to the expected cost of deviating from truthful bidding. We show that incentives for truthful bidding depend on the distribution of competing bidders' values and/or prices and individuals' true values for a good. The simulation indicates the 2nd price auction punishes deviations from truthful bidding more severely for high value individuals than the BDM mechanism. These results are confirmed by an experimental study, where we find more accurate bidding for high-value individuals in the 2nd price auction as compared to the BDM. Our results also indicate that when implementing the BDM mechanism, the greatest incentives for truthful value revelation are created when the random price generator is based on a normal distribution centered on an individual's expected true value.

Suggested Citation

  • Lusk, Jayson L. & Alexander, Corinne E. & Rousu, Matthew C., 2004. "Designing Experimental Auctions For Marketing Research: Effect Of Values, Distributions, And Mechanisms On Incentives For Truthful Bidding," 2004 Annual meeting, August 1-4, Denver, CO 20202, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea04:20202
    DOI: 10.22004/ag.econ.20202
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    References listed on IDEAS

    as
    1. Lusk, Jayson L., 2003. "Using Experimental Auctions for Marketing Applications: A Discussion," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(2), pages 1-12, August.
    2. John A. List, 2002. "Preference Reversals of a Different Kind: The "More Is Less" Phenomenon," American Economic Review, American Economic Association, vol. 92(5), pages 1636-1643, December.
    3. Ty Feldkamp & Ted C. Schroeder, 2004. "Experimental Auction Procedure: Impact on Valuation of Quality Differentiated Goods," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(2), pages 389-405.
    4. Fox, John A & Hayes, Dermot J & Shogren, Jason F, 2002. "Consumer Preferences for Food Irradiation: How Favorable and Unfavorable Descriptions Affect Preferences for Irradiated Pork in Experimental Auctions," Journal of Risk and Uncertainty, Springer, vol. 24(1), pages 75-95, January.
    5. repec:feb:artefa:0069 is not listed on IDEAS
    6. Wallace E. Huffman & Matthew Rousu & Jason F. Shogren & Abebayehu Tegene, 2003. "The Public Good Value of Information from Agribusinesses on Genetically Modified Foods," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(5), pages 1309-1315.
    7. Noussair, Charles & Robin, Stephane & Ruffieux, Bernard, 2002. "Do consumers not care about biotech foods or do they just not read the labels?," Economics Letters, Elsevier, vol. 75(1), pages 47-53, March.
    8. Charles Noussair & StÈphane Robin & Bernard Ruffieux, 2004. "Do Consumers Really Refuse To Buy Genetically Modified Food?," Economic Journal, Royal Economic Society, vol. 114(492), pages 102-120, January.
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    Cited by:

    1. Dragicevic, Arnaud Z. & Ettinger, David, 2011. "Private Valuation of a Public Good in Three Auction Mechanisms," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 2(2), pages 1-29, April.
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    3. Ji Yong Lee & Rodolfo M. Nayga & Cary Deck & Andreas C. Drichoutis, 2020. "Cognitive Ability and Bidding Behavior in Second Price Auctions: An Experimental Study," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(5), pages 1494-1510, October.
    4. Lee, Ji Yong & Han, Doo Bong & Nayga Jr, Rodolfo M. & Lim, Song-Soo, 2011. "Valuing traceability of imported beef in Korea: an experimental auction approach," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 55(3), pages 1-14, September.
    5. Ellison, Brenna & Kirwan, Barrett & Nepal, Atul, 2015. "Consumers' Willingness to Pay for Bioplastic Plant Containers: An Experimental Auction Approach," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205670, Agricultural and Applied Economics Association.
    6. Palma, Marco A. & Ness, Meghan L. & Anderson, David P., 2015. "Buying More than Taste? A Latent Class Analysis of Health and Prestige Determinants of Healthy Food," 2015 Conference (59th), February 10-13, 2015, Rotorua, New Zealand 202566, Australian Agricultural and Resource Economics Society.
    7. Bensch, Gunther & Grimm, Michael, 2024. "Behavioural constraints in energy technology uptake: Evidence from real-purchase offers in rural Rwanda and Senegal," Ruhr Economic Papers 1081, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    8. Dinah Pura T. Depositario & Rodolfo M. Nayga Jr & Yu Yvette Zhang & Robert Dominick E. Mariano, 2014. "Revisiting Cash Endowment and House Money Effects in an Experimental Auction of a Novel Agri-food Product in the Philippines," Asian Economic Journal, East Asian Economic Association, vol. 28(2), pages 201-215, June.
    9. Jay R. Corrigan & Andreas C. Drichoutis & Jayson L. Lusk & Rodolfo M. Nayga & Matthew C. Rousu, 2012. "Repeated Rounds with Price Feedback in Experimental Auction Valuation: An Adversarial Collaboration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 97-115.
    10. Chavez, Daniel & Palma, Marco, 2015. "Off the reservation: Pushing the bounds of rationality in experimental auctions," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 202164, Agricultural and Applied Economics Association.
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    12. 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.
    13. Kimenju, Simon Chege & De Groote, Hugo & Morawetz, Ulrich B., 2006. "Comparing Accuracy and Costs of Revealed and Stated Preferences: The Case of Consumer Acceptance of Yellow Maize in East Africa," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25642, International Association of Agricultural Economists.
    14. Borrello, M. & Cecchini, L. & Vecchio, R. & Caracciolo, F. & Cembalo, L. & Torquati, B., 2022. "Agricultural landscape certification as a market-driven tool to reward the provisioning of cultural ecosystem services," Ecological Economics, Elsevier, vol. 193(C).
    15. Palma, Marco & Ness, Meghan & Anderson, David, 2015. "Prestige as a Determining Factor of Food Purchases," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196694, Southern Agricultural Economics Association.
    16. Azucena GRACIA & Tiziana DE-MAGISTRIS, 2015. "The role of participants' competitiveness in consumers' valuation for food products using experimental auctions," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 61(10), pages 484-491.

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