Bidder Motives in Cause Related Auctions

A cause-related auction is different from a list price setting in two major ways: First, the donation percentage directly affects the price of the item in that consumers’ value for charitable contributions enters their bids. Second, charitable consumers have a price externality on non-charitable consumers, so even a segment of consumers who place a premium on charitable contributions can significantly affect prices for everybody else. The purpose of this paper is to characterize both the charity premium and the impact of the charitable segments with a careful field design. We examine individual choice between pairs of simultaneous auctions identical in all but percentage of the proceeds donated to charity. We investigate the extent to which individuals are willing to pay a charity premium in choice between auctions of various donation percentages. We use a mixture model approach to allow for different types of individual preferences. In analysis of choices between pairs of auctions, we find that individuals fall into three segments—bargain seekers and two altruistic segments. The altruistic segments, which drive up the charity premium, can in turn be classified into warm glow bidders—who derive a pleasure from doing the right thing—and other-regarding bidders—who are sensitive to the percentage given to charity. Further analysis shows that warm glow bidders positively contribute to the charity premium in pairs of auctions that do not differ much in donation percentages, whereas the other-regarding bidders drive up the premium in pairs of auctions that differ much in donation percentages. This means that managers should focus their marketing efforts on appealing to these different segments, depending on the percentage donated to charity relative to some near substitute. Correctly identifying the charitable segments and their impact is of utmost importance in cause related marketing, and we discuss managerial implications of bidder charitable motives in auctions.