Draft Copy: Please do not cite without permission from the authors. A Tale of Two Premiums—Examining Bids From a Multiple Round Vickrey Auction with Differing Information Sets

Two definitions of willingness-to-pay derived from a Vickrey auction with multi-product and multiple rounds with different information sets are examined. These definitions are examined in the context of valuing pork products with embedded environmental attributes and we show how information can have adverse effects on a base product of comparison. 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, many consumer studies have used experimental economics to obtain what people would pay for certain attributes related to products. These studies have elicited values from consumers related to food safety attributes (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 even how packaging affects the value of a product (Hoffman et al. 1993; Menkhaus et al. 1992). All of the experiments used in these studies have extracted consumer’s willingness-to-pay (WTP) by employing the use of a second price sealed-bid auction, also known as a Vickrey auction. In many of these auction studies the researchers have endowed a consumer with a product that has certain attributes and ask them to bid for a product with a new set of attributes (Roosen et al. 1998, Shogren et al., 1994b, Fox et al., 1994). The value derived from this can be considered the consumer’s willingness to pay for the new set of attributes. By endowing the participant’s in their studies with the product and asking them to give their willingness to pay for the new attributes, the researchers of these studies have assumed that the new good with the new set of attributes has a negligible effect or the effect is not important on the endowed good. We would argue that it is not only the premium or WTP for the attribute that is important, but also the effect the information released has on the endowed product. This in itself can be viewed as a type of premium. Hence, while the premium observed for the new set of attributes may be positive, this positive premium may be due to the consumer devaluing the endowed good. If consumers’ WTP is only coming from the devaluation of the endowed good, then the premium for the new set of attributes is not necessarily a sign of value added.