The Library

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

Tools

Isoni, Andrea. (2011) The willingness-to-accept/willingness-to-pay disparity in repeated markets : loss aversion or 'bad-deal' aversion? Theory and Decision, Vol.71 (No.3). pp. 409-430. ISSN 0040-5833

Preview

PDF
WRAP_Isoni_BDA_paper_accepted.pdf - Accepted Version - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (316Kb)

Official URL: http://dx.doi.org/10.1007/s11238-010-9207-6

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 reference-dependent and reference-independent models alike. This article 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.

Item Type:	Journal Article
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Value, Pricing, Loss aversion
Journal or Publication Title:	Theory and Decision
Publisher:	Springer Netherlands
ISSN:	0040-5833
Date:	September 2011
Volume:	Vol.71
Number:	No.3
Page Range:	pp. 409-430
Identification Number:	10.1007/s11238-010-9207-6
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
Funder:	Economic and Social Research Council (Great Britain) (ESRC)
Grant number:	PT-030-2005-00035 (ESRC)
References:	Adamowicz, W. L., Bhardwaj, V., and Macnab, B. (1993). ‘Experiments on the Difference between Willingness-To-Pay and Willingness-To-Accept’. Land Economics, 69(4), 416–427. Ariely, D., Loewenstein, G., and Prelec, D. (2003). ‘Coherent Arbitrariness: Stable Demand Curves without Stable Preferences’. Quarterly Journal of Economics, 118(1), 73–105. Bateman, I., Munro, A., Rhodes, B., Starmer, C., and Sugden, R. (1997). ‘A Test of the Theory of Reference-Dependent Preferences’. Quarterly Journal of Economics, 112(2), 479–505. Bell, D. E. (1985) ‘Disappointment in Decision Making Under Uncertainty’. Operations Research, 33, 1–27. Boyce, R. R., Brown, T. C., McClelland, G. H., Peterson, G. L., and Schulze, W. D. (1992). ‘An Experimental Examination of Intrinsic Values as a Source of the WTA-WTP Disparity’. The American Economic Review, 82(5), 1366–1373. Braga, J. and Starmer, C. (2005). ‘Preference Anomalies, Preference Elicitation and the Discovered Preference Hypothesis’. Environmental and Resource Economics, 32(1), 55–89. Braga, J., Humphrey, S. J., and Starmer, C. (2009). ‘Market Experience Eliminates Some Anomalies – and Creates New Ones’. European Economic Review, 53(4), 401–416. Brown, T. C. (2005). ‘Loss Aversion without the Endowment Effect, and Other Explanations for the WTA-WTP Disparity’. Journal of Economic Behavior and Organization, 57(3), 367–379. Bruni, L. and Sugden, R. (2007). ‘The Road Not Taken: How Psychology Was Removed from Economics, and How it Might Be Brought Back’. The Economic Journal, 117, 146–173. Coursey, D. L., Hovis, J. L., and Schulze, W. D. (1987). ‘The Disparity between Willingness to Accept and Willingness to Pay Measures of Value’. Quarterly Journal of Economics, 102(3), 679–690. Cox, J. C. and Grether, D. M. (1996). ‘The Preference Reversal Phenomenon: Response Mode, Markets and Incentives’. Economic Theory, 7(3), 381–405. Fehr, E. and Schmidt, K. M. (1999). ‘A Theory of Fairness, Competition, and Cooperation’. Quarterly Journal of Economics, 114(3), 817–868. Freeman, A. M. (1979). The Benefits on Environmental Improvement: Theory and Practice. John Hopkins Press, Baltimore. Geanakoplos, J., Pearce, D., and Stacchetti, E. (1989). ‘Psychological Games and Sequential Rationality’. Games and Economic Behavior, 1, 60-79. Hammack, J. and Brown, G. (1974). Waterfowl and Wetland: Toward Bioeconomic Analysis. John Hopkins Press, Baltimore. Hanemann, W. M. (1991). ‘Willingness to Pay and Willingness to Accept – How Much Can They Differ?’ The American Economic Review, 81(3), 635–647. Harless, D. W. (1989). ‘More Laboratory Evidence on the Disparity between Willingness to Pay and Compensation Demanded’. Journal of Economic Behavior and Organization, 11(3), 359–379. Hicks, J. R. (1943). ‘The Four Consumer Surpluses’. Review of Economic Studies, 8, 108–116. Horowitz, J. K. and McConnell, K. E. (2002). ‘A Review of WTA/WTP Studies’. Journal of Environmental Economics and Management, 44(3), 426–447. Horowitz, J. K. and McConnell, K. E. (2003). ‘Willingness to Accept, Willingness to Pay and the Income Effect’. Journal of Economic Behavior and Organization, 51(4), 537–545. Hu, W. (2007). ‘Bargains or Rip-offs? Reference Price Effects in Cojoint Stated Demand’. Journal of Agricultural and Resource Economics, 32(2), 256-272. Huck, S., Kirchsteiger, G., and Oechssler, J. (2005). ‘Learning to Like What You Have – Explaining the Endowment Effect’. The Economic Journal, 115, 689– 702. Isoni, Andrea. 2009. “The Willingness-to-accept/Willingness-to-pay Disparity in Repeated Markets: Loss Aversion or ‘Bad-deal’ Aversion?” CSERGE Working Paper edm-2009-06, Centre for Social and Economic Research on the Global Environment, University of East Anglia. Isoni, A., Loomes, G., and Sugden, R. (2010) ‘The Willingness to Pay-Willingness to Accept Gap, the “Endowment Effect”, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: A Reassessment’. The American Economic Review, in press. Kahneman, D., Knetsch, J. L., and Thaler, R. H. (1990). ‘Experimental Tests of the Endowment Effect and the Coase Theorem’. Journal of Political Economy, 98(6), 1325–1348. Knetsch, J. L. (1989). ‘The Endowment Effect and Evidence of Non-Reversible Indifference Curves’. The American Economic Review, 79(5), 1277–1284. Knetsch, J. L. and Sinden, J. A. (1984). ‘Willingness to Pay and Compensation Demanded – Experimental Evidence of an Unexpected Disparity in Measures of Value’. Quarterly Journal of Economics, 99(3), 507–521. Knetsch, J. L., Tang, F. F., and Thaler, R. (2001). ‘The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?’ Experimental Economics, 4, 257–69. Kolstad, C. D. and Guzman, R. M. (1999). ‘Information and the Divergence between Willingness to Accept and Willingness to Pay’. Journal of Environmental Economics and Management, 38(1), 68–80. Kopalle, P. K. and Lindsey-Mullikin, J. (2003) ‘The Impact of External referene Price on consumer Price Expectations’. Journal of Retailing, 79, 225-236. Köszegi, B. and Rabin, M. (2006). ‘A Model of Reference-Dependent Preferences’. Quarterly Journal of Economics, 121(4), 1133–1165. List, J. A. (2003). ‘Does Market Experience Eliminate Market Anomalies?’ Quarterly Journal of Economics, 118, 41–71. List, J. A. (2004). ‘Neoclassical Theory Versus Prospect Theory: Evidence from the Market Place’. Econometrica, 72(2), 615–25. Loomes, G. and Sugden, R. (1982). ‘Regret Theory: An Alternative Theory of Rational Choice under Uncertainty’. The Economic Journal, 92(368), 805– 824. Loomes, G. and Sugden, R. (1986). ‘Disappointment and Dynamic Consistency in Choice under Uncertainty’. Review of Economic Studies, 53(2), 271–282. Loomes, G., Starmer, C., and Sugden, R. (2003). ‘Do Anomalies Disappear in Repeated Markets? The Economic Journal, 113(486), C153–C166. Loomes, G., Orr, S., and Sugden, R. (2009). ‘Preference Uncertainty and Status quo Effects in Consumer Choice’. Journal of Risk and Uncertainty, 39, 113–135. Mandler, M. (2004). ‘Status Quo Maintenance Reconsidered: Changing or Incomplete Preferences? The Economic Journal, 114(499), F518–F535. Mas-Colell, A., Whinston, M. D., and Green, J. R. (1995). Microeconomic Theory. Oxford: Oxford University Press. Milgrom, P. R. and Weber, R. J. (1982). ‘A Theory of Auctions and Competitive Bidding’. Econometrica, 50(5), 1089–1122. Munro, A. and Sugden, R. (2003). ‘On the Theory of Reference-Dependent Preferences’. Journal of Economic Behavior and Organization, 50(4), 407– 428. Plott, C. R. (1996). ‘Rational Individual Behaviour in Markets and Social Choice Processes: The Discovered Preference Hypothesis’. In K. Arrow, E. Colombatto, M. Perleman, and C. Schmidt, editors, Rational Foundations of Economic Behavior, pages 225–250. Macmillan, London. Plott, C. R. and Zeiler, K. (2005). ‘The Willingness to Pay-Willingness to Accept Gap, the “Endowment Effect”, Subject Misconceptions, and Experimental Procedures for Eliciting Valuations’. The American Economic Review, 95(3), 530–545. Putler, D. S. (1992). ‘Incorporating Reference Price Effects into a Theory of Consumer Choice’. Marketing Science, 11, 287–309. Randall, A. and Stoll, J. R. (1980). ‘Consumer’s Surplus in Commodity Space’. The American Economic Review, 70(3), 449–455. Rowe, R. D., D’Arge, R. C., and Brookshire, D. S. (1980). ‘An Experiment on the Economic Value of Visibility’. Journal of Environmental Economics and Management, 7(1), 1–19. Samuelson, W. and Zeckhauser, R. (1988). ‘Status Quo Bias in Decision Making’. Journal of Risk and Uncertainty, 1, 7–59. Schulze, W. D., D’Arge, R. C., and Brookshire, D. S. (1981). ‘Valuing Environmental Commodities: Some Recent Experiments’. Land Economics, 57(2), 151–172. Shogren, J. F., Shin, S. Y., Hayes, D. J., and Kliebenstein, J. B. (1994). ‘Resolving Differences in Willingness to Pay and Willingness to Accept’. The American Economic Review, 84(1), 255–270. Shogren, J. F., Cho, S., Koo, C., List, J., Park, C., Polo, P., and Wilhelmi, R. (2001). ‘Auction Mechanisms and the Measurement of WTP and WTA’. Resource and Energy Economics, 23, 97–109. Sugden, R. (1999). ‘Alternatives to the Neo-Classical Theory of Choice’. In I. J. Bateman and K. G. Willis, editors, Valuing Environmental Preferences: Theory and Practice of the Contingent Valuation Method in the US, EU and Developing Countries, pages 152–180. Oxford University Press. Sugden, R. (2003). ‘Reference-Dependent Subjective Expected Utility’. Journal of Economic Theory, 111(2), 172–191. Thaler, R. (1980). ‘Toward a Positive Theory of Consumer Choice. Journal of Economic Behavior and Organization, 1(1), 39–60. Thaler, R. (1985). ‘Mental Accounting and Consumer Choice’. Marketing Science, 4, 199–214. Tversky, A. and Kahneman, D. (1991). ‘Loss Aversion in Riskless Choice: A Reference-Dependent Model’. Quarterly Journal of Economics, 106(4), 1039– 1061. Vickrey, W. (1961). ‘Counterspeculation, Auctions, and Competitive Sealed Tenders’. Journal of Finance, 16(1), 8–37. Wicksteed, P. (1910). The common sense of political economy, Volume I. Routledge, London. [page reference to 1933 edition] Willig, R. D. (1976). ‘Consumer’s Surplus without Apology’. The American Economic Review, 66(4), 589–597.
URI:	http://wrap.warwick.ac.uk/id/eprint/38759