Experimental auctions

315 Pages·2007·1.308 MB·English

by  Lusk J.L., Shogren J.F.

ExperimentalAuctions
Economists, psychologists, and marketers are interested in determining the
monetaryvaluepeopleplaceonnon-marketgoodsforavarietyofreasons:
tocarryoutcost-benefitanalysis,todeterminethewelfareeffectsoftechno-
logicalinnovationorpublicpolicy,toforecastnewproductsuccess,andto
understandindividualandconsumerbehavior.Unfortunately,manycurrently
available techniques for eliciting individuals’ values suffer from a serious
probleminthattheyinvolveaskingindividualshypotheticalquestionsabout
intended behavior. Experimental auctions circumvent this problem because
they involve individuals exchanging real money for real goods in an active
market.Thisrepresentsapromisingmeansforelicitingnon-marketvalues.
LuskandShogrenprovideacomprehensiveguidetothetheoryandpractice
ofexperimentalauctions.Itwillbeavaluableresourceforgraduatestudents,
practitioners, and researchers concerned with the design and utilization of
experimentalauctionsinappliedeconomicandmarketingresearch.
JaysonL.LuskisProfessorandWillardSparksEndowedChairintheDepart-
mentofAgriculturalEconomics,OklahomaStateUniversity.
Jason F. Shogren is Stroock Distinguished Professor of Natural Resource
Conservation and Management, and Professor of Economics and Finance,
UniversityofWyoming.
QuantitativeMethodsforAppliedEconomicsandBusinessResearch
SeriesEditor
PROFESSORPHILIPHANSFRANSES
ErasmusUniversity,Rotterdam
Researchers and practitioners in applied economics and business now have access to
a much richer and more varied choice of data than earlier generations. Quantitative
MethodsforAppliedEconomicsandBusinessResearchisanewseriesaimedatmeeting
theneedsofgraduatestudents,researchersandpractitionerswhohaveabasicgrounding
instatisticalanalysisandwhowishtotakeadvantageofmoresophisticatedmethodology
intheirwork.
Forthcomingtitles
StewartJonesandDavidHensher(eds.),CreditRiskModelling:APrimer
Experimental Auctions
Methods and Applications in Economic and
Marketing Research
JaysonL.LuskandJasonF.Shogren
cambridge university press
Cambridge,NewYork,Melbourne,Madrid,CapeTown,Singapore,Sa˜oPaulo
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(cid:1)C JaysonL.LuskandJasonF.Shogren2007
Thispublicationisincopyright.Subjecttostatutoryexception
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noreproductionofanypartmaytakeplacewithout
thewrittenpermissionofCambridgeUniversityPress.
Firstpublished2007
PrintedintheUnitedKingdomattheUniversityPress,Cambridge
AcataloguerecordforthispublicationisavailablefromtheBritishLibrary
LibraryofCongressCataloguinginPublicationdata
Lusk,Jayson.
Experimentalauctions:methodsandapplicationsineconomicandmarketing
research/JaysonL.LuskandJasonF.Shogren.
p.cm.–(Quantitativemethodsforappliedeconomicsandbusinessresearch)
Includesbibliographicalreferencesandindex.
ISBN–13: 978–0–521–85516–7(hbk.)
ISBN–10: 0–521–85516–0(hbk.)
ISBN–13: 978–0–521–67124–8(pbk.)
ISBN–10: 0–521–67124–8(pbk.)
1.Auctions. 2.Consumers’preferences–Mathematicalmodels. I.Shogren,Jason
F. II.Title. III.Series.
HF5476.L87 2007
330.072(cid:2)4–dc22 2007002291
ISBN 978-0-521-85516-7hardback
ISBN 978-0-521-67124-8paperback
CambridgeUniversityPresshasnoresponsibilityforthepersistenceor
accuracyofURLsforexternalorthird-partyinternetwebsitesreferredto
inthispublication,anddoesnotguaranteethatanycontentonsuch
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Acknowledgments
Participating in an auction is a collective process and so is conducting one.
We have had the good fortune of learning about experimental auctions with
a number of colleagues and students including: Todd Cherry, Keith Coble,
TomCrocker,ScottDaniel,TyFeldkamp,SeanFox,SaraGunnersson,Dermot
Hayes,LisaHouse,DarrenHudson,WallyHuffman,SaraJaeger,JimKlieben-
stein, Cannon Koo, Muhammad Koohmaraie, John List, Christy Lusk, Dana
Marcellino,MichaelMargolis,DarrellMark,ChrisMcIntosh,BryanMelton,
JimMintert,MelissaMoore,BurtMorrow,BaileyNorwood,GregParkhurst,
MattRousu,TedSchroeder,S.Y.Shin,LucineTadevosyan,AbeTegene,Bruce
Traill, Carlotta Valli, Bob Wilhelm, and Christine Wilson. Sara Jaeger pro-
videdhelpfulcommentsonanumberofthechapters.Seminarparticipantsat
theJourne´esd’E´conomieExpe´rimentaleatBureaud’EconomieThe´oriqueet
Applique´e, Universite´ Louis Pasteur, Strasbourg provided helpful comments
onthematerialinchapters9and10.
Thisbookisdedicatedtoourfamiliestheirsupportandpatienceduringthe
writingofthisbook.
v

Contents
Listoffigures page ix
Listoftables x
1 Introduction 1
1.1 Introduction 1
1.2 Whyexperimentalauctions? 3
1.3 Whatisanexperimentalauction? 5
1.4 Purposeofthisbookandboundariesofcoverage 17
2 Incentivecompatibleauctions:theoryandevidence 19
2.1 Introduction 19
2.2 Theoryofincentivecompatibleauctions 20
2.3 Evidencefrominducedvalueauctions 27
3 Valuetheory 34
3.1 Introduction 34
3.2 Valuationundercertainty 34
3.3 Valuationunderuncertainty 37
3.4 Valuationinadynamicenvironmentwithuncertainty,limitedinformation,
andirreversibility 43
3.5 Summary 44
4 Conductingexperimentalauctions:somepreliminaries 46
4.1 Introduction 46
4.2 Experimentaldesign 47
4.3 Samplesizedetermination 55
4.4 Experimentsettingandcontext:fieldversuslaboratory 57
4.5 Conclusions 61
5 Conductingexperimentalauctions 62
5.1 Introduction 62
5.2 Trainingandpractice 62
5.3 Endowmentversusfullbidding 65
5.4 Choosinganauctionmechanism 69
5.5 Multiplegoodvaluation,demandreduction,andfieldsubstitutes 76
5.6 Learningandaffiliationinrepeatedbiddingrounds 80
5.7 Negativevalues 92
5.8 Conclusions 94
vii
viii Contents
6 Dataanalysis 95
6.1 Introduction 95
6.2 Censoredregressionswithauctionbids 95
6.3 Quantileregressionwithauctionbids 100
6.4 Paneldataregressionwithauctionbids 103
6.5 Othertypesofdataanalysiswithauctionbids 106
6.6 Conclusions 112
7 Valuationcasestudies 113
7.1 Introduction 113
7.2 InformingPolicyI:beeftendernessgradingsystem 113
7.3 InformingPolicyII:valuingsaferfood 121
7.4 InformingPolicyIII:toleranceforgeneticallymodifiedfood 129
7.5 MarketingI:forecastingmarketshareofanewproduct 137
7.6 MarketingII:preferencesforfreshfoodwithmultiplequalityattributes 141
7.7 MarketingIII:thevalueoffarmfinancialrecords 149
7.8 ControversialgoodsI:demandforgeneticallymodifiedfoodinthree
countries 154
7.9 ControversialgoodsII:irradiation 163
7.10 ControversialgoodsIII:foodfromanimalstreatedwithgrowth
hormones 169
7.11 Concludingcomments 174
Appendices 175
8 Auctiondesign:casestudies 196
8.1 Introduction 196
8.2 Preferencelearning 196
8.3 Willingnesstopay,willingnesstoaccept,andtheauctionmechanism 199
8.4 Secondpriceauctiontournaments 209
8.5 Preferences:fixedorfungible? 217
8.6 Giftexchange 225
8.7 Calibrationofrealandhypotheticalauctionbids 229
8.8 Hybridauctionsandconsequentialbidding 239
8.9 Concludingremarks 245
9 Validityofexperimentalauctions 247
9.1 Introduction 247
9.2 Auctionbidsandeconomictheory 248
9.3 Reliability 252
9.4 Convergentvalidity 255
9.5 Anomalies 261
9.6 Summary 267
10 Thefutureofexperimentalauctions 269
10.1 Introduction 269
10.2 Tenquestionsworthyoffutureresearch 270
10.3 Concludingremarks 278
References 279
Index 297
Figures
1.1 Experimentalauctionsasabalanceofcontrolandcontext page15
5.1 Expectedcostofsub-optimalbiddingforv =3,N=8,
i
andvalues/pricesaredrawnfromauniformdistribution
on[0,10] 75
5.2 Expectedcostofsub-optimalbiddingforv =7,N=8,
i
andvalues/pricesaredrawnfromauniformdistributionon
[0,10] 76
5.3 Secondpriceauctionbidsforfivebeefsteaksacrossfive
biddingrounds 81
5.4 Bidfunctionsandthedeterminationofwinner,loser,and
marketprice 90
6.1 Distributionoffifthpriceauctionbidsforanon-genetically
modifiedcookieinFrance 101
6.2 Hypotheticalpathmodelwheresixauctionbidsare
representedbytwolatentfactors 108
7.1 Thethreetypesoflabelsusedforthevegetableoil 133
7.2 Distributionofroundfiveauctionbidsbylocation 159
7.3 Effectofinformationonbidsforirradiatedpork 166
7.4 Averagewillingnesstopayfor“non-BST”milkinIowa,
Arkansas,Massachusetts,California(rural)andCalifornia
(urban) 172
B7.1 Financialrecordsinventorysheet 190
B7.2 Financialrecordsbidsheet 190
ix
Tables
1.1 Examplesofexperimentalauctionsinaction page7
2.1 Payoffsfrombiddingstrategies 22
2.2 Payofffrombiddingtruevalueinsteadofunder-or
over-bidding 23
2.3 Resultsofstudiestestingincentivecompatiblemechanisms
ininducedvalueexperiments 31
4.1 Fourexperimentaltreatments 48
4.2 Treatmentsina23design 49
4.3 Higherordereffectsina23design 50
4.4 Acomparisonoftwofractionalfactorialdesigns 51
4.5 Samplesizecorrectiontablefor95%levelofconfidence 57
5.1 Someincentivecompatibleauctions 69
5.2 SummaryofpaneldatacategoriesinListandShogren(1999) 83
5.3 Two-wayfixedeffectsestimationresultsforbidequation 84
5.4 Secondpriceauctionbidsforbeefsteakacrossfivebidding
rounds 87
5.5 Aggregateandindividualmodelsoftheeffectofposted
pricesonbiddingbehavior 88
6.1 Comparisonoftobittodoublehurdlemodel 99
6.2 Conditionalmeanandquantileregressions 103
7.1 Summarystatisticsofauctionbidsandthevalueof
tenderness(n=116) 119
7.2 Priceandprobabilityassumptionsusedinwelfare
calculations 120
7.3 Consumerwelfarechangesfromatendernessgrading
system(allunitsin$perchoiceoccasion;n=116) 120
7.4 Subjectiveandobjectiveriskandacomparisonofna¨ıveand
informedoptionprice(Ra)offivepathogens 127
7.5 Summarystatisticsoftestswithineachadditional
salmonellatreatment 128
7.6 Bidsonnon-geneticallymodifiedfoodwithdiffering
tolerancelevels 135
x