WTP and WTA in a WTP and WTA in a competitive competitive environment environment Shosh Shahrabani Shosh Shahrabani 1 , Tal Shavit , Tal Shavit 2 , Uri , Uri Benzion Benzion 1,3 1,3 1. 1. The Max Stern Academic College of Emek The Max Stern Academic College of Emek Yezreel, Yezreel, Israel Israel 2. 2. College of Management and The Open College of Management and The Open University of Israel. University of Israel. ESA- World Meeting June 2007 ESA- World Meeting June 2007
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WTP and WTA in a competitive environment Shosh Shahrabani 1, Tal Shavit 2, Uri Benzion 1,3 1. The Max Stern Academic College of Emek Yezreel, Israel 2.
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WTP and WTA in a WTP and WTA in a competitive environmentcompetitive environment
Shosh ShahrabaniShosh Shahrabani11 , Tal Shavit , Tal Shavit22, Uri Benzion, Uri Benzion1,31,3
1.1. The Max Stern Academic College of Emek Yezreel,The Max Stern Academic College of Emek Yezreel, IsraelIsrael2.2. College of Management and The Open University of Israel. College of Management and The Open University of Israel.
ESA- World Meeting June 2007 ESA- World Meeting June 2007 at LUISS ,in Roma, Italyat LUISS ,in Roma, Italy
Experimental results have found that Experimental results have found that
the WTPthe WTP (Willingness- To- Pay) (Willingness- To- Pay) is loweris lower than than
the WTAthe WTA (Willingness- To- Accept) in different (Willingness- To- Accept) in different
states and for different commodities. states and for different commodities.
This difference has been explained by a number This difference has been explained by a number
of psychological effects, among them of psychological effects, among them loss loss
aversionaversion, and the , and the endowment effect. endowment effect.
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Background (cont.)Background (cont.)
However, recent studies have questioned However, recent studies have questioned
the existence and interpretation of a the existence and interpretation of a
possible gap between WTP and WTA possible gap between WTP and WTA (Shogren et al., 2001; Plott and Zeiler, 2005; Horowitz (Shogren et al., 2001; Plott and Zeiler, 2005; Horowitz
and McConnell, 2002)and McConnell, 2002)
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Background (cont.)Background (cont.)
In addition, several studies have In addition, several studies have
compared the bidding patterns of subjects compared the bidding patterns of subjects
in different auction mechanisms. in different auction mechanisms.
Despite the theoretical equivalence among Despite the theoretical equivalence among
the various auction mechanisms, it was the various auction mechanisms, it was
found that behavior in these mechanisms found that behavior in these mechanisms
may diverge (Lusk et al. 2004) may diverge (Lusk et al. 2004)
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ObjectivesObjectives The purpose of the current study is to examine the WTP and The purpose of the current study is to examine the WTP and
the WTA of individuals by analyzing buying and selling the WTA of individuals by analyzing buying and selling
bidding patterns for both physical product bidding patterns for both physical product (mugs)(mugs) and and
monetary assets monetary assets (lotteries)(lotteries) in two separate auctions in two separate auctions
which is an example of a which is an example of a competitive environmentcompetitive environment since since
subjects compete against each other to win the auction,subjects compete against each other to win the auction,
2.2. The BDM mechanism- The BDM mechanism- (Becker-DeGroot-Marschak(Becker-DeGroot-Marschak, 1964) , 1964)
which is an example of which is an example of a non-competitive environmenta non-competitive environment, since it , since it
is a random number auction (selected by the computer). is a random number auction (selected by the computer).
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HypothesesHypotheses
We expect to find different bidding patterns for individuals in We expect to find different bidding patterns for individuals in competitive versus non-competitive auctions, since competitive versus non-competitive auctions, since individuals may be influenced by:individuals may be influenced by:
The “Win-Loving” effectThe “Win-Loving” effect, or the “top-dog” effect (Cherry et , or the “top-dog” effect (Cherry et al. 2004, Corrigan & Rousu ,2003) which reflects the al. 2004, Corrigan & Rousu ,2003) which reflects the extra pleasure gained from winning itself (especially extra pleasure gained from winning itself (especially relevant in a competitive environment such as the SPA) . relevant in a competitive environment such as the SPA) .
In addition, we expect that:In addition, we expect that:
the WTA-WTP disparitythe WTA-WTP disparity in a in a competitive auctioncompetitive auction will be will be lowerlower than the WTA-WTP disparity in a than the WTA-WTP disparity in a non-competitive non-competitive auctionauction,, since win-loving may affect both WTP and WTA in since win-loving may affect both WTP and WTA in competitive auctions. competitive auctions.
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Experimental procedureExperimental procedure
The participants in the experiment were 95 students at The participants in the experiment were 95 students at Ben-Gurion University, who were divided into two groupsBen-Gurion University, who were divided into two groups
SPA group- SPA group- 52 students were asked to bid prices in a 52 students were asked to bid prices in a second-price-auctionsecond-price-auction
BDM group- BDM group- 43 students were asked to bid prices for 43 students were asked to bid prices for the same assets in the BDM mechanism.the same assets in the BDM mechanism.
Participants were asked to bid prices for buying and Participants were asked to bid prices for buying and selling mugs and for several different lotteries. selling mugs and for several different lotteries.
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Instructions to subjectsInstructions to subjectsInstructions to the SPA groupInstructions to the SPA group, , In the case of a buying (selling) auction, the person with the In the case of a buying (selling) auction, the person with the highest highest
bidding price( bidding price( lowest lowest asking) will win the auction, but will pay the asking) will win the auction, but will pay the second highestsecond highest bidding ( bidding (lowestlowest asking) price in the group asking) price in the group participating in the auction. participating in the auction.
Instructions to the BDM groupInstructions to the BDM group,, For each asset, a number between the low value and high value For each asset, a number between the low value and high value
would be randomly selected by the computer. would be randomly selected by the computer. in the case of a buying auction, if the bidding price is above the in the case of a buying auction, if the bidding price is above the
random number, the bidder will pay the random number and get random number, the bidder will pay the random number and get the lottery.the lottery.
However, if the bidding price is below the random number, the However, if the bidding price is below the random number, the bidder will not get the lottery and will remain with the initial bidder will not get the lottery and will remain with the initial endowment.endowment.
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Description of the AuctionsDescription of the Auctions
Two parts auctions:Two parts auctions:
Mugs’ auctions:Mugs’ auctions: The auctions in the first part The auctions in the first part were for black and gray mugs. The mug auction were for black and gray mugs. The mug auction offered only one of the mugs (to buy or to sell). offered only one of the mugs (to buy or to sell).
Lotteries auctions:Lotteries auctions: The auctions in the second The auctions in the second part were for six lotteries presented in Table 1. part were for six lotteries presented in Table 1.