The Impact of Perceived Prices on Willingness to Pay in Experimental Auctions
While experimental auctions are demand revealing in theory, recent studies question whether bids fully reflect willingness to pay due to the presence of outside substitutes available in conventional markets. The presence of outside substitutes implies that bids should theoretically be censored from above at the market price. While bid price censoring has been recognized in the literature, previous research has not examined the specific dollar level at which bids should be censored--the price at which a product can actually be purchased outside of the experimental auction or the price at which participants believe it can be purchased. We provide evidence from a field interview and experimental auction that individual-specific "perceived prices" differ from actual market prices. The dichotomy between perceived and true market prices is shown to have significant implications for econometric analysis of bid price data.
Corrigan, Jay R.; Rousu, Matthew C.; and Colson, Gregory, "The Impact of Perceived Prices on Willingness to Pay in Experimental Auctions" (2010). Journal of Agricultural & Food Industrial Organization 8(1). Faculty Publications. Paper 51.
Journal of Agricultural & Food Industrial Organization