Interpreting Bids From a Vickrey Auction when There Are Public Good Attributes

This paper provides a model that allows for interpreting bids in a Vickrey auction when the good has public good attributes. It also examines information obtained from a Vickrey auction, which collected consumer’s willingness-to-pay for pork products that had embedded environmental attributes, and applies the new interpretation to the bids. Copyright 2003 by Sean P. Hurley and James B. Kliebenstein. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. 1 Dr. Hurley is an Assistant Professor of Agribusiness at California Polytechnic State University while Dr. Kliebenstein is a Professor of Economics at Iowa State University. The authors gratefully acknowledge The Leopold Center for Sustainable Agriculture for its generous support of this work. For questions or comments regarding this paper, please email Dr. Hurley at: [email protected]. Introduction Since the early 1990’s, a floodgate of research has opened up using experimental economics, specifically Vickrey auctions, to obtain consumers’ willingness-to-pay for attributes related to products. Auctions have been used to elicit values for food safety attributes in selected food products (Fox, 1994; Fox et al., 1995; Fox et al., 1996; Hayes et al. 1996; Roosen et al. 1998), quality differences in food products (Melton et al. 1996a, 1996b; Umberger et al., 2001), and packaging of food products (Hoffman et al. 1993; Menkhaus et al. 1992). Fox et al. went one step further and used experimental techniques to calibrate contingent values from a CVM study (1998). While there are four primary auctions that have been used in the market to value goods— the first price auction, the second price (Vickrey) auction, the Dutch auction, and the ascending auction—the Vickrey auction or a variant of it is one of the more widely used auctions in the research arena for examining people’s willingness-to-pay for an attribute. The reason researchers prefer using the Vickrey auction is that it has a mechanism that provides for truthfully revealing demand preferences. There are two objectives of this paper. The first objective is to provide a model that allows for the interpretation of bids in a Vickrey auction when the good has embedded environmental attributes. The second objective is to examine bid data from an experiment that has collected consumers’ willingness-to-pay for pork products with embedded environmental attributes. Specifically, bids will be examined from a multiple round Vickrey auction to investigate whether consumers’ have a willingness-to-pay for environmental attributes related to production air quality, surface water, and ground water. 2 One offshoot of the Vickrey auction is the random n price auction. For more information regarding this auction method, see Shogren et al (2001).