WTP and WTA in a
competitive environment
Shosh Shahrabani1 , Tal Shavit2, Uri Benzion1,3
1.
2.
The Max Stern Academic College of Emek Yezreel, Israel
College of Management and The Open University of Israel.
ESA- World Meeting June 2007
at LUISS ,in Roma, Italy
Outlines
 Background
 Objectives
 Methods
 Results
 Summary
& Conclusions
2
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.
3
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)
4
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)
5
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.
2.
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,
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).
6
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.
7
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.
8
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.

However, if the bidding price is below the random number, the
bidder will not get the lottery and will remain with the initial
endowment.
9
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.
10
Table 1a
Lotteries Auctions
Probability
50%
40%
10%
Expected
Value
Lottery A
200
40
0
116
Lottery B
200
40
10
117
11
Table 1b
Lotteries Auctions
Probability
60%
30%
10%
Expected
Value
Lottery C
20
10
0
15
Lottery D
20
10
5
15.5
12
Table 1c
Lotteries Auctions
Probability
10%
60%
30%
Expected
Value
Lottery E
1000
20
5
113.5
Lottery F
1000
20
0
113
13
Results
14
Table 3: Average bidding prices for mugs
in SPA and BDM
WTP
(buying position)
SPA BDM T-test
(p-value)
SPA to
BDM
5.93
Black 9.08 5.57
(0.00)
Mug
Gray 7.38
Mug
5.12
3.8
(0.00)
WTA
(selling position)
SPA BDM T-test
(p-value)
SPA to
BDM
6.27 5.71
1.02
(0.16)
5.42
5.48
0.12
(0.45)
15
Table 4: Average bidding prices for lotteries in
SPA to BDM
WTP
SPA
WTA
BDM T-test
SPA
(p-value)
SPA to
BDM
BDM T-test
(p-value)
SPA to
BDM
Lottery 92.55 77.89
A
1.68
(0.05)
88.70
99.42
1.49
(0.07)
Lottery 95.77 76.77
B
2.05
(0.02)
86.25
96.16
1.20
(0.12)
Lottery 12.67 10.98
C
1.65
(0.05)
12.13
13.04
1.00
(0.16)
16
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).
17
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.
18
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
19
Table 5: WTA-WTP disparity
in each mug auction
WTA-WTP
SPA
BDM
Black Mug
-2.81+
0.14
T-test
(p-value)
SPA to BDM
4.71 (0.00)
Gray Mug
-1.96+
0.36
3.46 (0.00)
+ p-value < 0.05; for the null hypothesis the average value
equals zero.
20
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).
21
Table 6: WTA-WTP disparity
in each lottery auction
WTA-WTP
SPA
BDM
T-test
(p-value)
SPA to BDM
Lottery A
-3.85
21.53+
2.4 (0.01)
Lottery B
-7.48
19.39+
2.4 (0.01)
Lottery D
0.51
3.58+
2.34 (0.01)
22
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.
23
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.
24
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.
25
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.
26