How to measure consumers’ willingness-to-pay by experimental auctions

Abstract

THE AIMS OF THE PAPER

The purpose of the paper was to introduce and illustrate how consumer behaviour can be investigated and analysed based on primary empirical data with the help of experimental auction methodology by applying the particular point of view of Behavioral Economics. This essay paid special attention to how to measure consumers’ willingness-to-pay and which statistical methodology is appropriate to analyse information and data from experimental auction mechanisms.

METHODOLOGY

Accordingly, price research methods based on revealed and stated preferences were contradictorily analysed by examining models of perceiving prices and the function of reference price additionally. We compared and assessed the major types of Vickrey-auction as one of the most widely used auction mechanism. Based on primary empirical data, it was critically valuated how Vickrey second-price auction procedure can be applied to measure consumers’ willingness-to-pay. In this investigation, identifying the relevant statistical tools and methodology came to focus.

MOST IMPORTANT RESULTS

Our results confirmed that auction mechanism makes possible to analyse and measure consumers’ willingness-to-pay from the perspective of Behavioral Economics. Additionally, these procedures can bring considerable benefits compered to methods based on revealed preferences. We came to the conclusion that in case of choosing the appropriate type of auction mechanism the complexity of communication of the process towards the participants, the number of products sold, their costs and the types of information to be gained should be considered. Cognitive biases are to be revealed and assessed because they may affect the reliability of the results gained by the auction experiment.

RECOMMENDATIONS

Our result suggested that in case of analysing data from experimental auction processes in addition to measures of location and dispersion testing for the normality of data and examining their asymmetry is of primary importance. Identifying extreme values can be considered as a crucial point of the analysis, which could require an arbitrary decision in case of values from the right side of the distribution.