Designing Experimental Auctions for Marketing Research: The Effect of Values, Distributions, and Mechanisms on Incentives for Truthful Bidding

Abstract

Accurately estimating consumer preferences for new products is an arduous task made difficult by the fact that individuals tend to exhibit a number of biases when answering hypothetical survey questions. Experimental auctions have advantages over conventional methods of estimating consumer preferences because they provide incentives for consumers to truthfully reveal their preferences. However, there is currently little information available to determine which mechanism to select among the class of incentive compatible mechanisms. In this paper, we provide insight into the theoretical properties of several incentive compatible value elicitation mechanisms including the Becker, DeGroot, Marschak (BDM) mechanism, Vickrey nth price auctions, and the random nth price auction. In particular, we draw attention to the shapes of the payoff functions and illustrate that the mechanisms differ with respect to the expected cost of deviating from truthful bidding. We show that incentives for truthful bidding depend on the distribution of competing bidders' values and/or prices and individuals' true values for a good. Our approach can be viewed as a diagnostic tool to aid in selecting between preference elicitation mechanisms.