Confounded by the Field:

WTP in Food Auctions whenPrices are Increasing

John C. Bernard Na He

University of DelawareDepartment of Food & Resource Economics

Research supported by USDA/NRI grant 2003-35400-13812

WTP Auction Experiments

Use of auction experiments in determining WTP has increased greatly in past decade

WTP for food products a is major area: GM / non-GM foods Food safety / health information Steaks / Bison meat

Advantages: Non-hypothetical nature Auction mechanisms are incentive compatible

Should be better at gauging WTP than hypothetical survey methods

Field Price Issue

Non-hypothetical implies: Product exists in the field or Close substitute exists in the field

Field prices of substitutes could influence subject WTP and their bidding

Problem could be worse under times of field price fluctuations

Objectives

Overall objective was to see if results from auction experiments are confounded by prices in the field

Do field prices act as caps on bidding? How do bids change when field prices are changing? How do field prices influence the expectations of field

prices of substitute products? Can confounding be reduced by examining bid

differences instead of bid levels?

Field Price Censoring

Theory: Rational consumer should not be expected to bid above field price regardless of their value

Let Vi be subject i’s value, Bi be their bid, and P be the field price: Bi = min[Vi ,P]

Could bid over field price dependent on transaction costs. Let Ti be subject’s subjective notion of their transaction costs to get the good outside the experiment Bi = min[Vi ,P+Ti ]

Expected Field Price Censoring

Field price knowledge may be imperfect orNeed to judge unknown field price of a good by the

known field price of a substitute

Let Ei[P] be subject i’s expectation of the field price, then:

Bi = min[Vi , Ei[P]+Ti ]

Therefore can expect range of prices for good based on how consistent expectations are of field prices Censoring value is different for each individual

Literature

Harrison, Harstad, and Rutström (2004) Re-examined earlier study Found failure to account for field price censoring influence

results

Cherry, Frykblom, Shogren, List, and Sullivan (2004) Induced value experiments Subjects shaved bids toward price of outside option

Corrigan and Rousu (2008) Field experiment in supermarket Bids from consumers planning to purchase the product were not

significantly different from their field price expectations

Experiment Sessions

183 subjects professionally recruited from Delaware and vicinity

Payments approximately $50

First set of sessions: May 2007 139 subjects

Second set of sessions November 2007 44 subjects

Experimental Design

Description and practice auctions with Vickrey’s sealed-bid fifth price auction

Food auctions Definitions of attributes: conventional and organic Multiple food items, single trial Conventional price given One auction binding

Post-questionnaires Demographics Collect expected field prices for organic versions

Example: All bid their value except for subject C

Sub. Value Bid

A .60 .60B .55 .55C .50 .62D .65 .65

C bids morethan their value

Profit

0 0- .10 .05

Version Definitions

Conventional ‘Typical’ supermarket version Definitely would NOT meet organic standards

Organic No synthetic pesticides No hormones/antibiotics No irradiation No GM ingredients No petroleum/sewage sludge fertilizers

First SessionsFirst Sessions Second SessionsSecond Sessions

Milk (2%, half gallon) $2.35

Chicken Breasts (1 lb.) $3.99

Chocolate Chip Cookies $3.99

Tortilla Chips (14.5 oz.) $3.29

Milk (2%, half gallon) $2.77 (up 18%)

Chicken Breasts (1 lb.) $5.49 (up 37.5%)

Chocolate Chip Cookies $3.99

Tortilla Chips (14.5 oz.) $3.29

Food Products and Conventional Prices

Demand Curve Comparisons

Demand curves constructed following methodology of Lusk and Schroeder (2006)

Plot inverse cumulative density functions of the WTP bids

These regarded as demand curves with assumption each subject consumes at most one unit

Bids for Conventional Versions

Bids for Organic Versions

Tests and Hypotheses

Compare average bids across session sets Average bids expected higher for those facing increased

field prices

Examine percent of subjects bidding equal to (or over) respective field price Should be consistent across session sets

Compare field price expectations across session sets Expectations for organic field price should be higher

when conventional field price higher

Compare premiums for organic over conventional across session sets

Methodology for Comparisons

Test distribution of the bids for normality All bid series were non-normal

Brown and Forsythe tests for homogeneity of variances When variances homogeneous: Wilcoxon-Mann-

Whitney tests used When variances differ: Fligner-Plicello tests

performed

Changes in Bids Between Sets of Sessions

Comparison of Average Bids between First and Second Sessions

Mean of Session H0: Equal

Version Food First Second   p-value

Conventional Milk 2.107 2.143 0.0005

Chicken 3.535 4.407 0.0001

Cookies 3.257 2.989 0.0817

Tortilla Chips 2.814 2.589 0.0229

Organic Milk 2.545 2.340 0.1774

Chicken 3.957 4.865 0.0001

Cookies 3.746 3.085 0.0024

  Tortilla Chips 3.244 2.812  0.0175

Comparing Bids and Field Prices

Percentage of Bids Equal or Greater than Field Price Across Sessions

Percentage of BidsPercent Greater

Sessions Food Equal Greater  than First Set FP

First Set Milk 38.35% 9.02%

Chicken 45.86% 11.28%

Cookies 35.34% 6.02%

Tortilla Chips 37.59% 3.01%

Second Set Milk 21.43% 7.14% 59.52%

Chicken 21.43% 7.14% 76.19%

Cookies 19.05% 7.14%

  Tortilla Chips 19.05% 2.38%   

Changes in Field Price Expectations

Comparison of Price Expectations between Sets of Sessions

Mean of Session H0: Equal

Food First Second   p-value

Milk (2%) 3.220 3.417 0.0134

Chicken Breasts 4.517 6.142 0.0001

Chocolate Chip Cookies 4.079 3.847 0.0600

Tortilla Chips 3.604 3.440   0.1300

Changes in Premiums for Organic

Comparison of Percent Premiums Organic over Conventional

Mean of Session H0: Equal

Food First Second   p-value

Milk (2%) 21.52% 17.42% 0.2147

Chicken Breasts 14.80% 20.46% 0.3197

Chocolate Chip Cookies 19.25% 11.98% 0.1081

Tortilla Chips 17.79% 16.22%   0.2996

Conclusions and Implications

Bids appear influenced by field pricesPrice expectations and bids change with

changes in field pricesResearchers need to recognize the

confounded effects of the field on bid levels

Examining premiums / differences in bids appears to remove the field price censoring element