Confounded by the Field: WTP in Food Auctions when Prices are Increasing John C. Bernard Na He University of Delaware Department of Food & Resource Economics Research supported by USDA/NRI grant

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 V i be subject is value, B i be their bid, and P be the field price: B i = min[V i,P] Could bid over field price dependent on transaction costs. Let T i be subjects subjective notion of their transaction costs to get the good outside the experiment B i = min[V i,P+T i ]

Expected Field Price Censoring Field price knowledge may be imperfect or Need to judge unknown field price of a good by the known field price of a substitute Let E i [P] be subject is expectation of the field price, then: B i = min[V i, E i [P]+T i ] 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 subjects Second set of sessions November subjects

Experimental Design Description and practice auctions with Vickreys 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.ValueBid A B C D C bids more than their value Profit

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 Sessions Second 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 SessionH 0 : Equal VersionFoodFirstSecond p-value ConventionalMilk Chicken Cookies Tortilla Chips OrganicMilk Chicken Cookies Tortilla Chips

Comparing Bids and Field Prices Percentage of Bids Equal or Greater than Field Price Across Sessions Percentage of Bids Percent Greater SessionsFoodEqualGreater than First Set FP First SetMilk38.35%9.02% Chicken45.86%11.28% Cookies35.34%6.02% Tortilla Chips37.59%3.01% Second SetMilk21.43%7.14%59.52% Chicken21.43%7.14%76.19% Cookies19.05%7.14% Tortilla Chips19.05%2.38%

Changes in Field Price Expectations Comparison of Price Expectations between Sets of Sessions Mean of SessionH 0 : Equal FoodFirstSecond p-value Milk (2%) Chicken Breasts Chocolate Chip Cookies Tortilla Chips

Changes in Premiums for Organic Comparison of Percent Premiums Organic over Conventional Mean of SessionH 0 : Equal FoodFirstSecond p-value Milk (2%)21.52%17.42% Chicken Breasts14.80%20.46% Chocolate Chip Cookies19.25%11.98% Tortilla Chips17.79%16.22%

Conclusions and Implications Bids appear influenced by field prices Price expectations and bids change with changes in field prices Researchers 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