Are there gambling effects in incentive-compatible elicitations of reservation prices?

An empirical analysis of the BDM-mechanism

Abstract

Pricing research suggests incentive compatible evaluations of separate products in so-called monadic designs when consumers' situation-specific WTP is to be elicited in a monopolistic purchase setting. In our study, the lottery-based BDM-mechanism is applied for measuring subjects' WTP for a fast moving consumer good in binding one-on-one interviews at the point of purchase. In previous studies, the validity of elicited WTP measures is commonly checked within subjects with respect to indicators of face and criterion validity (such as interest in buying, preference ratings, compliance rates). In addition, we observed real purchases of a separate validation sample at the point of purchase, thus checking external validity between subjects. As a result, the BDM-based WTPs reveal a sufficient degree of internal face validity. However, the external validity in terms of a goodness of fit between WTP-based predictions and purchases of the validation sample is significantly reduced. Specifically, we observed a substantial underestimation of shares of non-buyers. Hence, a potential bias is indicated, leading to an overrating of consumers' true WTP in the lottery-based BDM-mechanism in the setting of our survey.