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. College of Management and The Open University of Israel. ESA- World Meeting June 2007 at LUISS,in Roma, Italy

2 Outlines  Background  Objectives  Methods  Results  Summary & Conclusions

3 Background  Experimental results have found that the WTP (Willingness- To- Pay) is lower than the WTA (Willingness- To- Accept) in different states and for different commodities.  This difference has been explained by a number of psychological effects, among them loss aversion, and the endowment effect.

4 Background (cont.) However, recent studies have questioned the existence and interpretation of a possible gap between WTP and WTA (Shogren et al., 2001; Plott and Zeiler, 2005; Horowitz and McConnell, 2002)

5 Background (cont.)  In addition, several studies have compared the bidding patterns of subjects in different auction mechanisms.  Despite the theoretical equivalence among the various auction mechanisms, it was found that behavior in these mechanisms may diverge (Lusk et al. 2004)

6 Objectives  The purpose of the current study is to examine the WTP and the WTA of individuals by analyzing buying and selling bidding patterns for both physical product (mugs) and monetary assets (lotteries) in two separate auctions mechanism: 1. The Second- Price-Auction, (SPA) (Vickery, 1961), which is an example of a competitive environment since subjects compete against each other to win the auction, 2. The BDM mechanism- (Becker-DeGroot-Marschak, 1964) which is an example of a non-competitive environment, since it is a random number auction (selected by the computer).

7 Hypotheses  We expect to find different bidding patterns for individuals in competitive versus non-competitive auctions, since individuals may be influenced by: The “Win-Loving” effect, or the “top-dog” effect (Cherry et al. 2004, Corrigan & Rousu,2003) which reflects the extra pleasure gained from winning itself (especially relevant in a competitive environment such as the SPA).  In addition, we expect that: the WTA-WTP disparity in a competitive auction will be lower than the WTA-WTP disparity in a non-competitive auction, since win-loving may affect both WTP and WTA in competitive auctions. the WTA-WTP disparity in a competitive auction will be lower than the WTA-WTP disparity in a non-competitive auction, since win-loving may affect both WTP and WTA in competitive auctions.

8 Experimental procedure  The participants in the experiment were 95 students at Ben-Gurion University, who were divided into two groups  SPA group- 52 students were asked to bid prices in a second-price-auction  BDM group- 43 students were asked to bid prices for the same assets in the BDM mechanism.  Participants were asked to bid prices for buying and selling mugs and for several different lotteries.

9 Instructions to subjects Instructions to the SPA group,  In the case of a buying (selling) auction, the person with the highest bidding price( lowest asking) will win the auction, but will pay the second highest bidding (lowest asking) price in the group participating in the auction. Instructions to the BDM group,  For each asset, a number between the low value and high value would be randomly selected by the computer. 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 the lottery. 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 the lottery. However, if the bidding price is below the random number, the bidder will not get the lottery and will remain with the initial endowment. However, if the bidding price is below the random number, the bidder will not get the lottery and will remain with the initial endowment.

10 Description of the Auctions  Two parts auctions:  Mugs’ auctions: The auctions in the first part were for black and gray mugs. The mug auction offered only one of the mugs (to buy or to sell).  Lotteries auctions: The auctions in the second part were for six lotteries presented in Table 1.

11 Table 1a Lotteries Auctions Expected Value 10%40%50%Probability Lottery A Lottery B

12 Table 1b Lotteries Auctions Expected Value 10%30%60%Probability Lottery C Lottery D

13 Table 1c Lotteries Auctions Expected Value 30%60%10%Probability Lottery E Lottery F

14 Results

15 Table 3: Average bidding prices for mugs in SPA and BDM WTA (selling position) WTP (buying position) T-test (p-value) SPA to BDM BDMSPAT-test BDMSPA 1.02 (0.16) (0.00) Black Mug 0.12 (0.45) (0.00) Gray Mug

16 Table 4: Average bidding prices for lotteries in SPA to BDM WTAWTP T-test (p-value) SPA to BDM BDMSPAT-test BDMSPA 1.49 (0.07) (0.07) (0.05) Lottery A 1.20(0.12) (0.02) Lottery B 1.00(0.16) (0.05) Lottery C

17 Results 1 WTP- buying auctions  For both mugs and lotteries in the buying auctions (WTP):  The WTP for an asset in a competitive auction (SPA) is higher than the WTP for the same asset in a non-competitive auction (BDM).

18 Results 2 WTA- selling auctions  For mugs and for most lotteries in the selling auctions (WTA):  The average selling prices in the SPA group were not significantly different from the average selling prices in the BDM group.

19 Results 3 WTA-WTP disparity  Table 5 presents the average WTA-WTP disparity for the mug auction,  and compare this disparity between the two groups SPA and BDM

20 Table 5: WTA-WTP disparity in each mug auction WTA-WTP T-test (p-value) SPA to BDM BDMSPA 4.71 (0.00) Black Mug 3.46 (0.00) Gray Mug + p-value < 0.05; for the null hypothesis the average value equals zero.

21 Results of Mugs’ Auctions  The average WTA-WTP gap in the SPA is significantly lower than the average WTA-WTP gap in the BDM.  In the SPA, the WTA-WTP disparity is significantly negative (Table 5). This indicates that in the competitive environment of the SPA, WTP > WTA, which is the opposite of the endowment effect.  One possible explanation is that the win-loving effect in the buying position is more dominant than the endowment effect in the selling position; therefore, the bidding price for buying is higher than the selling bidding price for the same product.  In the BDM auction, however, we did not find any significant difference between WTA and WTP (meaning WTP = WTA).

22 Table 6: WTA-WTP disparity in each lottery auction WTA-WTP T-test (p-value) SPA to BDM BDMSPA 2.4 (0.01) Lottery A 2.4 (0.01) Lottery B 2.34 (0.01) Lottery D

23 Results for Lotteries’ auctions  The WTA-WTP disparity in the SPA (a competitive auction) is lower than the average WTA-WTP gap in the BDM (a non- competitive auction), except for lotteries with low probability for high value.  The WTA-WTP disparity does not differ significantly from zero in the SPA (i.e., WTP = WTA) (except for lotteries E and F), while for the BDM mechanism this gap is significantly positive (WTP < WTA).  A possible explanation for this result is that for lotteries, the endowment effect in the selling position offsets the win-loving effect in the buying position of the SPA competitive environment. Hence, the WTA does not differ from the WTP.

24 Conclusions  The experimental results show that the competitive environment affects only the buying prices and not the selling prices.  It seems that in the selling position, participants are strongly affected by the endowment effect, which cancels the impact of the competitive environment.  In addition, the WTA-WTP disparity is lower in the competitive auction than in the noncompetitive auction.

25 Conclusions (cont.)  Our conclusion is that the WTA and WTP are affected by behavioral effects such as the endowment effect and the win-loving effect.  Moreover, WTA and WTP depend on whether the product is a real product (such as mugs) or a monetary value (as in lotteries), as well as on the structure of the lottery.

26 Conclusions (cont.) Finally, the results of this paper have important implications for the relevance of the results and conclusions of many previous works that used second-price-auction to determine the value of an asset, to classify subjects according to their risk attitude or to measure the WTA-WTP gap.