The willingness-to-accept/willingness-to-pay disparity in repeated markets: loss aversion or ‘bad-deal’ aversion?

Abstract

Several experimental studies have reported that an otherwise robust regularity -the disparity between Willingness-To-Accept and Willingness-To-Pay -tends to be greatly reduced in repeated markets, posing a serious challenge to existing referencedependent and reference-independent models alike. This paper offers a new account of the evidence, based on the assumptions that individuals are affected by good and bad deals relative to the expected transaction price (price sensitivity), with bad deals having a larger impact on their utility ('bad-deal' aversion). These features of preferences explain the existing evidence better than alternative approaches, including the most recent developments of loss aversion models.Keywords: WTA/WTP disparity, price sensitivity, bad-deal aversion, Vickrey auctions, reference-dependence, loss aversion. JEL classification: D11, D44 1The disparity between the Willingness-To-Accept (WTA) and Willingness-To-Pay (WTP) measures of value has been one of the most widely studied behavioural regularities in the last four decades. The disparity -which has been documented in a large number of contingent valuation and experimental studies 1 -poses serious challenges to Hicksian consumer theory and its applications to welfare economics.While in Hicksian consumer theory WTA and WTP can reasonably be expected to differ only by a few percentage points (Willig, 1976;Randall and Stoll, 1980) many studies have reported differences of much higher orders of magnitude. Such large disparities suggest that indifference curves are not reversible (Knetsch, 1989). They imply that the impact of policies that produce changes in resource allocation cannot be evaluated indifferently using the two measures, and that the resulting welfare changes cannot be approximated by changes in consumer's surplus. If improvements and deteriorations are regarded as highly asymmetrical, the Coase theorem no longer holds. Even in the absence of transaction costs and income effects, the outcome of a negotiation critically depends on the allocation of property rights. Yet, recently, several studies have found that the extent of the disparity is greatly reduced for experienced traders (List, 2003a(List, , 2004 and when agents repeatedly interact in experimental markets (e.g. Shogren et al., 2001;Loomes et al., 2003).Taken at face value, this whole body of evidence poses a theoretical puzzle.On the one hand, the existence and robustness of the disparity in one-off situations seems to indicate that preferences depart from the assumptions of standard consumer theory in systematic ways. This has led to the development of reference-dependent models that incorporate such departures (e.g. Tversky and Kahneman, 1991;Sugden, 2003;Köszegi and Rabin, 2006;Loomes et al., 2009). On the other hand, preferences elicited in experimental markets, in which subjects face feedback, repetition, and incentives, appear sometimes to be compatible with the properties generally assumed in reference-independent economic models. This paper offers a solu...

Expected prices as reference points—Theory and experiments

“…The reason is that the non-realised price seems an obvious candidate to compare the current price to. 3 While this formulation looks similar to the model of "bad-deal aversion" by Isoni (2011), and indeed shares some of the ideas expressed therein, the interpretation of the reference point is different. Unlike Isoni, my specification assumes that the reference price is derived directly from the distribution of possible prices in the market, whereas he defines the reference price as the price consumers expect to trade at and explicitly rules out the case that it is obtained by calculating the average of the price distribution (Isoni, 2011, fn.…”

O valor econômico da savana metalófita da Floresta Nacional de Carajás, estado do Pará: uma contribuição teórica e metodológica

“…Cinco tipos de vieses foram analisados por muitos pesquisadores (RANDALL; STOLL, 1980;HANEMANN, 1991;ARROW et al, 1993;HANEMANN, 1994;FARBER;WILSON, 2002;PLOTT;ZEILER, 2011;ISONI, 2011;HAUSMAN, 2012;CARSON, 2012;SANTANA et al, 2015):…”

“…A teoria econômica sugere que os dois valores tendem a ser iguais (KRUTILLA, 1967;RAN-DALL;STOLL, 1980;HOEHN;RANDALL, 1987;HANEMANN, 1991;MITCHELL, 1993;PLOTT;ZEILER, 2005;ISONI, 2011;LOUVIERE, 2011;HAUSMAN, 2012;CARSON, 2012;SANTANA, 2015). Por outro lado, a experiência prática desenvolvida em vários trabalhos gerou resultados diferentes.…”

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“…Putler (1992) claims that the reference price effects can be empirically tested, which was achieved in a study using weekly retail egg sales data from Southern California. Isoni (2011) also suggests that the effects of best or worst deal on purchasing decisions appear intuitively appealing because of their resemblance to the experience of everyday transactions. For example, the feeling of disappointment at knowing that a product we just bought can be found for a cheaper price is a common experience (Isoni, 2011).…”

“…Isoni (2011) also suggests that the effects of best or worst deal on purchasing decisions appear intuitively appealing because of their resemblance to the experience of everyday transactions. For example, the feeling of disappointment at knowing that a product we just bought can be found for a cheaper price is a common experience (Isoni, 2011). Nevertheless, Day et al (2012) suggest that the presence of the precedent-dependent ordering effects should be addressed since it is closely related to the issue of strategic misrepresentation of preferences in which a respondent might provide untruthful answers so as to manipulate the survey outcome to his/her benefit.…”