Relative willingness to pay and surplus comparison mechanism

Transcription

1 Relatve wllngness to pay and surplus comparson mechansm Perre Combrs 1, Erc Graud-Héraud 2, Alexandra Seabra Pnto 3 1 INRA UR133 AlSS, Ivry sur Sene, France ; Perre.Combrs@vry.nra.fr 2 INRA and GREThA/Unversty of Bordeaux, UMR CNRS 5113, Bordeaux, France: erc.graud-heraud@u-bordeaux.fr 3 Natonal Insttute for Agraran and Veternaran Research (INIAV,I.P.), Oeras, Portugal: alexandra.pnto@nav.pt Paper prepared for presentaton at the EAAE-AAEA Jont Semnar Consumer Behavor n a Changng World: Food, Culture, Socety March 25 to 27, 215 Naples, Italy

2 Relatve wllngness to pay and surplus comparson mechansm Perre Combrs 1, Erc Graud-Héraud 2, Alexandra Seabra Pnto rd Jont EAAE/AAEA Semnar, Consumer Behavor n a Changng World: Food, Culture and Socety, March 25-27, 215, Naples. Topc: How to ntegrate new approaches from socal scences for measurng consumers behavour n economcs? (objectves 1 and 2 of the 143 rd Jont EAAE/AAEA Semnar). Abstract We study the relatve wllngness-to-pay (WTP) of consumers accordng to the dversty of supply n a market and we show how the presence of substtutes for a gven product leads to queston the ncentve mechansms commonly used n expermental auctons. We propose a Surplus Comparson Mechansm (SCM) n order to yeld WTP estmates whch better take nto account the choce set avalable to consumers. After showng the effcency of ths mechansm we test the SCM n a laboratory experment, reconsderng WTP for food envronmental certfcatons (Integrated Pest Management and Organc certfcaton). It appears that WTPs are decreasng when more alternatve certfcatons are offered to consumers. Keywords: Expermental Auctons, Wllngness to pay, Consumers surplus, Choce alternatves, Food certfcaton. JEL classfcaton : C91, D44 1 INRA UR133 AlSS, Ivry sur Sene, France ; Perre.Combrs@vry.nra.fr 2 INRA and GREThA/Unversty of Bordeaux, UMR CNRS 5113, Bordeaux, France: erc.graudheraud@u-bordeaux.fr 3 Natonal Insttute for Agraran and Veternaran Research (INIAV,I.P.), Oeras, Portugal: alexandra.pnto@nav.pt 1

3 1. Introducton Very often, the sale of wne may exceed a thousand references n a large supermarket, when a small grocery store can propose only a dozen of brands. Do you thnk your wllngness to pay (WTP) for a bottle of 'Mouton Cadet' would be exactly the same n each outlet? And f you're addcted to port wne, do you really beleve that your WTP for the medocre 21 vntage would be the same before and after the release of the sublme 211 vntage? On a local farmers market of fruts and vegetables, do you thnk the decson to buy a klogram of conventonal apples may not dffer dependng on whether or not you have access to the organc verson of these apples? And fnally, would not a food nnovaton, such as a GMO product, be more easly accepted by recalctrant consumers, n the absence of conventonal product on the market? As ponted out by Dan Arely n hs book 'Predctably Irratonal' (28), we rely on comparsons and the decson process of an economc agent s always n the comparson. 1 The presence or absence of substtutes for a product that you wsh to purchase can alter the assessment that you make of ths product, not only because of the cost of acqurng a substtute when t s not avalable at the outlet, but also, and perhaps prmarly, because of an mmedate effect of comparson, often hghlghted n marketng research and cogntve psychology. Indeed, the lterature on categorzaton (see for examples Cohen and Basu, 1987; Pothos and Wlls. 211) helps to explan why each ndvdual makes hs own selecton when faced wth a set of several opportuntes for makng purchases envable choce. Ths theory explans how one product can be neglected when t s faced wth a large number of alternatves whle the same product would be consdered n the "category" of envable products n the absence of ths confrontaton. Moreover, t s well known n behavoural scences that the presence or absence of alternatves can nfluence the choce for a gven product. As notced by Bordalo, Gennaol and Shlefer (213, p. 817), the decoy effect prevously studed by Huber, Payne, and Puto (1982), or the compromse effect studed by Smonson (1989) 2 are such examples explanng that, gven an offered set, the relatve attractveness of a partcular opton x compared to another y often depends on the presence or absence of a thrd opton z (see also Bazerman et al. (1999) and Tversky and Smonson (1993) for the volaton of the ndependence of rrelevant alternatves). Consequently, evdence has 1 See also the effects of anchor and reference ponts, accordng to the prospect theory (Kahneman and Tversky, 1979). 2 The decoy effect occurs when the demand for an opton s larger when an alternatve objectvely nferor s added. The compromse effect occurs when the presence of two extreme optons favors the choce of an ntermedate product. 2

4 emerged that decsons are nfluenced by context, n apparent contradcton wth standard assumptons of ratonal decson makng. We argue that these consderatons must lead to revst the ncentve mechansms used n expermental auctons to elct wllngness-to-pay (WTP) for products. In partcular, we thnk that too lttle attenton has been pad to the mpact of the number of goods that partcpants have to evaluate n an experment. Fxed costs consderatons and the appeal of testng a varety of product attrbutes justfy multple-good valuaton n the same experment. To avod demand reducton when partcpants are n a poston to purchase several products, random selecton of one product and one treatment s the usual way to proceed, because of ths random selecton of a bndng product, "subjects' bds should not be nfluenced by the number of goods auctoned" (Lusk et al., 24, p. 43). However, evaluatng the same goods n solaton or smultaneously may lead to sgnfcant dfferences or even reversals n the estmates (see also Lst, 22). Surprsngly, expermental studes measurng consumers' WTP for dfferent products, dfferent specfcatons, certfcatons, or nformatonal stuatons, rarely take nto account the nfluence of the dversty of supply. Many dfferent aucton mechansms (Vckrey second prce, random nth prce, BDM, etc.) and procedures (full bdng or endowment) are currently used n these studes. However, whatever the protocol, as soon as many products or rounds are nvolved, partcpants are nformed from the outset that one bndng aucton wll be randomly selected at the end of the sesson and that each partcpant wll purchase at most one product. Therefore, some consumers may nflate ther WTPs for less-lked products, to avod endng up buyng nothng n case one of those less-lked product would be randomly chosen for the bndng sale at the end of the experment. Ths technque may result n based estmates for two reasons: frst, because the consumer s forced to mentally solate each product offered for sale (snce n any case, ths solaton wll be mposed ex-post by the expermenter); second, because ths procedure may lead to ex-post regret of purchasng a product whch does not maxmze the consumer's surplus. Moreover, f n many works wth expermental auctons the concept of "Consumers surplus" s explctly used to explan the consumer behavour or to assess the effects of publc polces, t must be noted that, n these experments, consumers are not confronted wth surplus maxmzaton takng nto account all the possble purchases (see, for example, Rousu and Corrgan, 28, Lusk et al., 25, or Alfnes, 29). 3

5 The endowment approach, n whch partcpants are gven one of the tested products and asked to bd for an "upgraded" verson, could be vewed as a good way to place consumers n a comparson stuaton. However, as shown clearly by Alfnes (29), the endowment approach has the major dsadvantage of placng the consumer n an asymmetrcal stuaton where the tested products are not treated equally. Ths results n well-documented problems (loss averson, WTP-WTA gap, reference-dependent preferences, ) and also rases the ssue that a product s generally not consdered as an "upgrade" by all consumers. Moreover, when ths method s used to compare more than two products (Roosen et al., 1998; Lusk et al., 24), the random selecton of a bndng product may agan solate the dfferent alternatves that the expermenter would lke to compare. Choce experments have the advantage of focusng on comparson between substtutes. However the use of posted prces may strongly nfluence partcpants and retrevng ndvdual WTPs for polcy smulaton s usually not straghtforward. That s the reason why we propose to explore another approach takng advantage of expermental aucton mechansms combned wth explct surplus comparson to account for the effect of the dversty of choce alternatves on the decson of buyers. Our method of 'Surplus Comparson Mechansm (SCM) conssts n encouragng consumers to focus on the maxmzaton of surplus and consequently on the comparson of products that are offered on a market. Usng a conceptual framework we show, n secton 2, how the use of tradtonal procedures for measurng WTP s not revealng. Conversely, we also show the optmalty of SCM that we propose. Then, we propose n sectons 3 and 4 an emprcal applcaton of the SCM on an example often dscussed n the emprcal lterature on food consumpton,.e the WTP for strengthenng envronmental producton condtons of agrcultural products (reducng the use of pestcdes) and ther potental effects on consumer health (reducton of pestcde resdues n food). By retanng only three qualtatve levels of producton (conventonal producton, Integrated Pest Management, Organc certfcaton), we show how the consumer WTP for one of these three products s strongly dependent, but n a non-erratc manner, on the actual presence on the market of the alternatve certfcatons. It appears that the WTP for one specfc certfcaton s decreasng wth the number of alternatves presented to consumers and that ths result s even stronger when the product s of low qualty. The fact that ths result s measured structurally on a large majorty of the populaton we have tested, confrms the exstence of a restrctve choce bas whch may be a consequence of decoy and 4

6 compromse effects mentoned above. Secton 5 s devoted to the concluson and lessons learned from a poltcal economy perspectve. 2. Model and ncentve mechansm for revealng WTP In ths secton, we propose a model of consumer behavour, drectly derved from Mussa and Rosen (1978) and we justfy our approach for measurng WTP n lab experments. Then we explan the SCM, showng how t s ncentve compatble wth comparatve behavours for purchasng goods. 2.1 Modellng consumers behavour wth alternatve choces We consder a market represented by J stores ndexed by j=1,,j. Wthn each store, one or more qualtes of the same product are avalable. We denote by K all possble qualtes ndexed by k = 1,..., K and t s assumed that the qualty of a product s very well marked and recognzable by consumers. Each store j s sellng a lmted number of possble qualtes (subset of K). Denote by p k,j the prce of qualty k wthn the store j. There are N consumers, spread nto the J stores and ndexed by = 1,..., N. We denote by U (k, j) the utlty of consumer (measured monetarly) for purchasng the qualty k, n the store j. Note that the ntroducton of the parameter j n ths utlty s to capture possble behavoral effects related to a specfc salence of qualty k for the customer n the respectve store. Purchase n a sngle-product store Consder a store j that has only one type of product qualty k. A consumer I, present n ths store j, gets the surplus S (k, j,p k,j ) by buyng one unt of product: S (k, j, p k, j ) = U (k, j ) - δj pk, j - (1) The parameter δ specfes an "opportunty cost" to purchase n the store j. Ths cost can be j postve when t refers to mental condtonng at the tme of purchase on the market. In the case of expermental auctons, ths can be for example a commtment cost (Lusk et Shogren, 27, p. 43). The exstence of ths knd of cost s lkely to explan why WTPs are often lower than market prces of the correspondng products (.e. the problem of external valdty of lab experments). The parameter δ could also refer to the unwllngness to purchase the good at j the tme of experence (ths s especally true for pershable or dffcult to store food 5

7 products). δ could also represent a transportaton cost when t s negatve (.e. the j opportunty to purchase the good durng the tme of experence). In ths last case we could observe WTPs greater than the prces obtaned n the real market. Fnally U (k, j ) - δ j can be vewed as the actual utlty of the consumer durng the experment. Under the condtons of the formula (1), the consumer buys one unt of the product, f and only f S (k, j,p k,j ) >, whch gves the followng condton: w k, j p w ; U (k, j ) - δ } (2) k, j k, j Max{ represents the wllngness-to-pay for the purchase qualty k for consumer n the store j. In ths case, but only n ths case, the consumer s not n a poston to compare dfferent possbltes of purchase and has no other opton but to buy the product offered to hm, f the prce s below to ts actual utlty. j Purchase n a mult-product store It s now assumed that the consumer s n a store j 1 that offers more than one qualty of product (the qualty k beng suppled wth other levels of qualty k 1, k 2, ). In ths case, the consumer buys the product of qualty k f and only f : U (k, j 1 ) δj pk,j Max ; Max{ U (k, j 1 ) - δ j - pk,j } k k (3) The wllngness to pay for qualty k s then the followng: w U (k, j ) δ } k, j Max ; 1 1 j Max ; Max{ U (k, j) - δ 1 j - pk, j k k (4) Ths tme the consumer s no longer content to verfy that the purchase of the product gves her a postve surplus. She also compares her surplus wth the one obtaned by purchasng a dfferent product qualty, when t s actually avalable wthn the store j 1. Thus, the wllngness to pay for qualty k 1 wthn the store j 1 can be decreased by the presence of dfferent alternatves of purchase wthn the store. Consequently the consumer could refuse to buy the qualty k 1, even f the sellng prce of ths qualty s below ts actual utlty. The procedures of choce experment operate n ths way wth posted prces whch allow to observe the buyng behavour n a stuaton close to realty. In ths case, the number of substtutes, wth knowledge of the sales prce, can nfluence the purchase decson and the wllngness-to-pay of the product that has to be evaluated. 6

8 2.2 Expermental aucton and Surplus Comparson Mechansm An expermental aucton s a market where there are a number of products for whch we seek to assess the wllngness-to-pay of consumers. Therefore the consumer s n a poston to compare the products rather than to make ndependent evaluaton regardless of the assessment he can make for the dfferent substtutes. Ths s the prncple of many behavoral economcs approaches. Ths s also the bass of our approach to reveal the WTP n the context of expermental auctons. In the absence of posted prces t s possble to ask drectly to consumers ther wllngness-topay for each of the products and to ensure that such statements s made credble usng an ncentve mechansm. The most popular mechansms are Vckrey second prce aucton, random nth prce aucton and the Becker-DeGroot-Marschak (BDM) mechansm. In all cases, n the absence of behavoral effects related to the salence of products, the wllngness-to-pay for one product s not nfluenced by the presence or absence of substtutes. A sale procedure that uses these mechansms for each product that s evaluated (or for any of these products randomly drawn) s n prncple ncentve compatble 3, because the ratonal choce of the consumer s to reveal hs true WTP. However, there s a strong contradcton between wantng to evaluate the WTP of a product compared to other products (whch s routnely done n ths type of experment) and denyng consumers the possblty to make comparsons at the moment of the declaraton of the WTPs. In fact, f a consumer has a desre to change hs wllngness-to-pay based on the alternatves proposed n the expermental market, then the use of ndependent aucton mechansms s not justfed. The reason s that f one product s randomly selected, or f each product s sold separately, the consumer s n a buyng stuaton wthout any possble alternatve. He s therefore oblged to reveal a WTP (at the tme of hs bd) antcpatng ths sale wthout possble purchase alternatves. Thus, the stated WTP may not actually reflect the apprecaton that he can have for a product compared to alternatves. 3 Note, however, the crtcsm of Horowtz (26), when the dstrbuton of potental sell prces s ex-ante known by the consumer. 7

9 The Surplus Comparson Mechansm The surplus comparson mechansm s based on the BDM mechansm wth a random prce draw for all the products that are tested, and wthout consderng that the dstrbuton of potental market prces s known from the outset by partcpants. In these condtons t s possble to calculate the consumer surplus, not for a sngle product selected by the expermenter (or randomly chosen), but for all the products sold durng the lab experment. Defnton (SCM) Consder N products avalable on a market. The SCM s defned by a game between a seller and a buyer where the buyer has to propose N bds for buyng each product. Then N market prces (one prce for each product) are randomly drawn from a dstrbuton unknown to the buyer. The product that gets the hghest surplus (dfference between the bd and the market prce) s sold to the consumer f ths surplus s strctly postve. No product s sold to the consumer f ths maxmum surplus s zero or negatve. Thus, the consumer s well aware that hs proposed bd on a gven product wll be compared to other bds offered on substtutes and that the product she buys wll be the one that brngs her the hghest surplus (and not just a postve surplus). Note that the SCM s equvalent to the BDM n the case of monoproduct stores (snce the condton of postve surplus s equvalent to the condton that the prce s below the wllngness-to-pay). Note also that t s qute easy to explan ths mechansm to consumers n the case of an expermental aucton (see the next secton below) and that ths explanaton allows them to focus on the comparson of the dfferent products they have to evaluate. Proposton Consder consumers who want to adapt ther bds accordng to the dversty of the products for sale. In a lab experment, usng the BDM mechansm (or any other aucton mechansm) on a sngle alternatve randomly chosen among all the products for whch consumers bd before the sale, s not ncentve compatble. Conversely, the SCM s ncentve compatble for revealng wllngness-to-pay. Demonstraton Consder a consumer and two stores j 1 and j 2 n whch are potentally sold two substtutes, k 1 and k 2. Suppose that only the product k 1 s sold n the store j 1 and both products k 1 and k 2 are avalable n the store j 2. We assume that the consumer WTP for k 1 s dfferent between the two stores,.e w w. Let B 1 the bd for qualty k 1 of k,j k,j

10 ' consumer n store j 1 and B 1 the bd for qualty k 1 of consumer n store j 2. In accordance wth the BDM mechansm t s a domnant strategy for consumer to bd B = w (because f 1 k, j 1 1 acceptable prce and f B < w 1 k, j B > w k, j 1 1 the consumer could not to buy the product at an the consumer could have to buy the product at a too hgh prce). In store j 2, f the consumer knows that only one product wll be randomly selected, then the optmal bd wth the BDM mechansm would be also B = w ' 1 k, j 1 1 snce the consumer s already confronted wth a monoproduct supply, lke n store j 1. Consequently the use of BDM mechansm s not ncentve compatble. Conversely, wth the SCM used n store j 2, suppose the consumer bds a prce B < w ' 1 k, j 1 2. Then, he takes the rsk ether to be forced to buy the product k 2, whch n realty gves a lower surplus, gven the prces drawn at random, or not to buy any products, whle the product qualty ' k 2 gave hm a strctly postve surplus. If the consumer bds a prce B > w 1 k, j 1 2, he takes the rsk to buy the product k 1, whle t does not gve hm the maxmum surplus (.e ether because he wll not be able to buy the product k 2 whch would gve hm the maxmum surplus or because he wll not be n a poston to buy anythng f randomly drawn prces are too hgh for both products n relaton to actual WTPs). To prove expermentally the relevance of ths surplus comparson mechansm, two desgns can be used: () a between-group desgn n order to show how statstcally the value of a product can be sgnfcantly dfferent dependng on whether or not the product s evaluated alone on the market () or a wthn-subjects desgn wth dfferent treatments, each one correspondng to a store n whch a specfc set of products s offered for sale. In ths case, f one of these stores s randomly chosen at the end of the experment (and f the consumer knows that ex-ante) t wll be possble to measure changes n WTP based on the actual alternatve products offered n each store. Obtanng sgnfcant results usng a between-group desgn requres a large number of consumers and a homogeneous populaton between the dfferent groups. Ths led us to choose the second opton. Admttedly, the wthn-subjects desgn, requres more cogntve effort from the consumers, n partcular because they had to fully antcpate that ex-post they wll actually make ther purchase n a specfc store where some of the products may or may not be offered. However, ths can also be vewed as an unfavourable stuaton to test our predctons. 9

11 3. Evdence from the choce between food certfcatons: protocol The experment we have performed to llustrate the relevance of the SCM s lnked to the debate on the envronmental certfcaton of food products. The number of publc and prvate standards n ths sector s partcularly mportant (wth dfferent organc certfcaton types and a large number of standards based on Integrated Pest Management, IPM). Therefore consumers face a wde varety of products n the stores' product lnes, only on ths crteron of dfferentaton. The market can then be descrbed as a vertcally dfferentated market wth () conventonal or regular products (wthout certfcaton), () products wth IPM certfcatons () organc products (Bazoche et al., 213). It s ths classfcaton that we use here to compare the consumers WTP, ceters parbus, usng the SCM. 3.1 Subjects The experment was conducted n the sensory laboratory of the Insttuto Superor de Agronoma (ISA), n Lsbon, wth eght sessons. The frst sesson was held n November 212 (12 partcpants to test the protocol) and the other seven sessons took place n October 213 (1 partcpants who partcpated n one of 7 sessons). The one hundred and twelve partcpants were recruted from the general populaton of Lsbon. A marketng research company was hred to randomly recrut ndvduals n the age group eghteen to seventy years old to partcpate n a frut and vegetables preference study. Age restrctons were mplemented to ensure that a dsproportonate number of students or retrees, wth relatvely low opportunty cost of tme, would not domnate the sample. The partcpants were contacted by phone and they were selected f they ate apples at least once a week and f they regularly partcpated n the food purchasng. The soco-economc characterstcs of the partcpants were obtaned wth the recrutment questonnare. The partcpants were pad 25 to partcpate n the experment and receved ther partcpaton fee on arrval at the sesson when they flled a consent form. One day before the experment, a convocaton letter was sent to all of them wth a general explanaton of the experment. In ths letter, the random sellng-prce procedure and the surplus concept were also presented. The number of partcpants n each sesson vared from twelve to sxteen persons. 3.2 Products The products used for ths experment were 1kg bag of Golden Delcous apples obtaned from two commercal sources: one supermarket and one organc market, both n Lsbon. The apples were packed nto clear bags for easy nspecton. Three types of Golden Delcous 1

12 apples were defned accordng to ther producton method. The frst type, Regular apple, was presented to the consumers as the apple produced accordng to the European and Natonal regulaton for pestcde use; wth no brand, no logo or stcker. The second one, Integrated Pest Management (IPM) apple, was presented as the apple type produced wth a controlled reducton of pestcde and dentfed by a natonal logo (the logo Proteção Integrada ). Fnally, the Organc apple was presented as the apple type produced wthout chemcal nputs and dentfed wth the European organc label (whch s also the logo the most wdespread n Portugal for organc products). Wth the partcpaton of dstrbutors, the three apples certfcatons were selected wth a sngle sze (65-7), wth no sgnfcant vsual dfferences, ncludng no cosmetc defects. 3.3 Procedure At the outset of each sesson, care was taken to make sure all partcpants were famlar wth the concepts mentoned durng the experment. Wth the support of a presentaton, the dfferences between wllngness-to-pay, market prce and surplus were explaned and dfferent examples were gven to facltate ther understandng. At ths stage of the presentaton, the ncentve mechansm, SCM, was ntroduced. Several examples, wth one, two or three products, respectvely, were presented to show how the SCM worked. Dfferent purchase and no purchase stuatons were smulated to emphasze the preference revelaton property of ths mechansm and to explan why t was n a partcpant s best nterest to bd hs true valuaton for each product. Followng ths frst part of the presentaton, partcpants were nformed that they would carry out the evaluaton of dfferent types of apples n dfferent possble "stores". Partcpants were also told that a real sale would take place at the end of the sesson. Specfcally, consumers were nformed that an urn contanng balls on whch were nscrbed prces wll be used to draw market prces for each type of apple (.e for each type of certfcaton) and n every sales stuaton. 4 At any tme durng the experment, consumers had no nformaton about the dstrbuton of prces wthn the urn. They were only nformed that for each partcpant, one store wll be randomly selected at the end of the experment, and that the market prces wll be drawn for each type of certfcaton n ths store. Then they wll have the oblgaton to buy one klogram of the apples that would brng them the hghest surplus. After these explanatons and all subsequent questons answered, the experment started. The three dfferent types of apples were presented to partcpants at the same tme. They were 4 The urn contaned 3 balls, wth prces rangng from,2 to 2,. 11

13 nformed about the apples varety ( Golden Delcous ) and orgn (Portugal), ther producton methods and the meanng of the two dfferent logos. Also they were prevously nformed that the three types of apples would not necessary be offered n each store. However, partcpants were alerted to the fact that at the end of the experment they would purchase only n one sngle store. Seven stores were defned accordng to all the varous possble combnatons of dfferent types of apples. Durng the eght sessons, the order of the presentaton of the stores was the same 5, wth the followng, Store 1: Sellng of the Regular Apple Store 2: Sellng of the Organc Apple Store 3: Sellng of the Regular and Organc Apples Store 4: Sellng of the IPM Apple Store 5: Sellng of the Regular and IPM Apples Store 6: Sellng of the IPM and Organc Apples Store 7: Sellng of the Regular, IPM and Organc Apples Partcpants dd not know n advance the seres of stores they would go through. Durng each step, apples were presented and evaluated smultaneously. For all the steps, the partcpants could only make a vsual nspecton of the products and examne the labels. They could not taste the apples. A maxmum purchase prce for each apple type was recorded for each partcpant at the end of each step. Partcpants were nformed that f they dd not lke a specfc type of apple, they always had the possblty to ndcate a buyng prce of zero. When a new step started, partcpants could not go back or change the prces they had gven. Durng the last phase of the experment, the prces of dfferent types of apple, avalable n each store, were randomly drawn from the urn. These prces were wrtten on a whteboard to make them vsble to the partcpants. After that, each partcpant randomly drew a retal store (Selectng a numbered card from 1 to 7). In ths store and followng the SCM procedure, the partcpant bds were compared wth the market prces, and the partcpant had to buy 1 klo of the apple type that gave hm the hghest surplus. 5 Usually the order of presentaton plays an mportant role gven surprse effects that consumers can have durng an experment. However n our case, consumers were fully nformed of potentally avalable products n a store. Ths lmted the effect of the presentaton order of the choce set. 12

14 4. Results 4.1 Sample and Data As the recrutment procedure and protocol were the same, we decded to pool the data of the eght sessons. After some control for coherence of the data, we decded to exclude one partcpant of the October 213 sessons, whose mean WTP was 4.75 tmes hgher than the mean WTP of all other partcpants and 81% hgher than the mean WTP of the second hghest bdder of the sample. So we ended up wth a total of 111 partcpants for the analyss. Table 1 shows the man soco-demographc characterstcs of the sample. Table 1. Socodemographc characterstcs of the sample Number of partcpants 111 Number of women 6 Number of men 51 Mean S.D. Mn Max Age Educaton (1=prmary; =secondary; 3=some college or more) Income ( /month per capta) Household sze Number of chldren The 111 partcpants ncluded n our analyss valued 3 types of apples (regular, IPM, and Organc) n 7 dfferent stores, correspondng to as many dfferent choce sets 6 (3 choce sets wth only one apple, 3 wth 2 apples, and 1 wth 3 apples. Each apple was then evaluated 4 tmes (once alone, twce wth one of the other two varants and once wth the other two varants), whch means 12 evaluatons for each partcpant and a total of 1332 WTPs. The mean and medan WTP are equal to 1.2 /kg. Almost 1% (132) of WTPs are equal to zero, but no partcpant refused to buy systematcally. The maxmum number of refusals per partcpant s 8, the average number s 1.1 and the medan s. 4.2 WTP for regular, IPM and organc apples accordng to the choce set The man emprcal ssue of the paper s to test whether WTP for a gven product s affected by the choce set taken nto consderaton when consumers are assessng the values of the dfferent products. It s mportant to stress agan that the pont of nterest, here, s the sze and 6 Throughout the rest of the paper the term "store", whch was supposedly more famlar to consumers, wll be replaced by "choce set", whch s conceptually more relevant. Ths wll allow us to rearrange the order of the choce sets, to focus frst on those that refer to sngle-product stuatons (benchmarks of our study). 13

15 composton of the choce set and not the nformaton related to each of the alternatves presented. When partcpants started ther evaluatons of the products n the dfferent choce sets they already had all the nformaton about the characterstcs of the dfferent products, and no further nformaton was released untl the end of the experment. Table 2 shows mean prces (and correspondng standard devatons of the mean) for each of the three apples accordng to the choce set consdered when the assessment was made. When consdered n solaton, n choce sets 1 to 3, WTP are 1.16 /kg for the conventonal apple, 1.23 for the IPM apple, and 1.54 for the organc. As can be seen drectly from Table 2, WTPs are lower for all apples as soon as they are consdered jontly wth one or two other varants n choce sets 4 to 7. Table 2. Mean WTP accordng to apple and choce set Choce set Apple Mean WTP Organc ( /kg) (SE of mean) (.6) (.6) (.6) (.6) (.3) IPM ( /kg) (SE of mean) (.5) (.6) (.6) (.5) (.3) Regular ( /kg) (SE of mean) (.5) (.6) (.6) (.6) (.3) Mean WTP ( /kg) (SE of mean) (.5) (.5) (.6) (.4) (.4) (.5) (.3) (.2) To test whether these changes n WTP are sgnfcant, two lnear regressons of ndvdual WTP on apple type and choce set have been run. Results are dsplayed n Table 3. The frst regresson (1) measures the mpact of apple type when apples are evaluated alone (choce sets 1 to 3, varables Organc, IPM and Regular) and when they are evaluated jontly wth one other apple or all together (choce sets 4 to 7, varables OrgancXAlter, IPMXAlter and RegularXAlter). The IPM apple evaluated alone (n choce set 2) s the reference. Results show that when evaluatons are made separately, the organc apple s valued hgher than the other two apples (IPM and Regular), for whch WTPs are not sgnfcantly dfferent. When evaluated jontly, WTPs for all three apple decrease sgnfcantly compared to WTPs evaluated separately. Testng the dfferences between the three pars of coeffcents shows that 14

16 the decrease n WTP s more pronounced for the regular apple compared to the IPM and Organc, for whch the decrease s not sgnfcantly dfferent. Table 3. Impact of choce set on WTP (1) Apple and choce set (2) Apple and choce set sze Coeffcents Standard error Coeffcents Standard error Organc.38*** ***.45 IPM ref ref ref ref Regular ***.39 OrgancXAlter -.86**.25 IPMXAlter -.64**.19 RegularXAlter -.22***.3 Choce set sze = 1 ref ref Choce set sze = ***.16 Choce set sze = ***.2 Constant 1.23*** ***.53 Observatons Legend: * p<.5; ** p<.1; *** p<.1 Standard errors are adjusted to account for ntra-partcpant correlaton. The second model regresses WTP on apple type and choce set sze separately, agan the IPM s the reference for apple type and sze =1 for choce set sze. As shown n Table 3, thrd column, all coeffcents are hghly sgnfcant. Testng for equalty shows that they also sgnfcantly dffer between apples (Organc vs. Regular, p<.1), and between choce set sze (sze = 2 vs. sze = 3, p=.6). Ths shows clearly that, when choce set sze s accounted for, WTPs for the three apples are sgnfcantly dfferent. Moreover, t s also clear that mean WTP decreases (by.11 and then agan by.4 ) when the sze of the choce set ncreases from one to three. To sum up, these results, show that: - When apples are evaluated n solaton, WTP for IPM and Regular apples are not sgnfcantly dfferent, but when the choce set sze s accounted for, WTP for all three apples appear to be sgnfcantly dfferent. - When apples are evaluated jontly (2 by 2, or all together), WTP s lower, and WTP decreases when choce set sze ncreases. The decrease beng more pronounced for the least valued apple (the conventonal). 15

17 4.3 Indvdual behavours Consderng dfferent alternatve products jontly nstead of separately leads to a decrease n the mean WTP for each alternatve. Ths could result from dfferent ndvdual behavours. For example, n a stuaton where they have access to a close, and possbly more attractve, substtute, consumers may refuse to buy one of the products ("boycott" effect) or reduce the prce they offer to pay for ths product. Some consumers may also be nsenstve to the choce set, and stck to ther evaluaton of each product whatever the substtutes avalable at the moment of purchase. Moreover, we cannot exclude that the avalablty of a substtute may ncrease the WTP for a product evaluated alone, f the presence of the substtute makes the product look better than when t s consdered alone. Whch behavour wll preval s an emprcal queston, dependng on ndvduals, products and choce sets. To nvestgate these dfferent possbltes, we have compared WTP for each partcpant and each apple, when the apple s evaluated alone and when t s evaluated jontly wth one or two alternatves. For the sake of smplcty, we comment only on ths last case, that s when the three products are evaluated together compared to separately (the detaled results for all possble cases are dsplayed n the annex at the end of the paper). When the choce set changes, partcpants can stck to ther prevous evaluaton, decrease or ncrease ther WTP. Prevous results ndcate that ncreasng WTP s a margnal reacton and that decreasng WTP s much more frequent. A mean decrease n WTP may be the outcome of two dfferent responses: a consumer may stop buyng (then WTP drops to zero) or keep on buyng, but at a lower prce. Both reactons are worth measurng as they may have dfferent mpacts on the market. In Table 4, partcpants are dstrbuted accordng to ther change n WTP for each apple, when evaluatons are made separately compared to when they are made jontly for the three apples. Four cases are presented: no change, ncrease n WTP, stop buyng, decrease n WTP. Below the number of subjects correspondng to each case, average WTP under both condtons (alone/together) are shown, as well as the mpact on the mean WTP for each apple. 16

18 Table 4. Change n average WTP when evaluatons are made separately or jontly Change n WTP accordng to choce set sze Stable Increase Stop buyng Decrease Total Organc Number of subjects WTP f evaluated alone ( /kg) WTP f evaluated together ( /kg) Impact on average WTP ( /kg) IPM Number of subjects WTP f evaluated alone ( /kg) WTP f evaluated together ( /kg) Impact on average WTP ( /kg) Regular Number of subjects WTP f evaluated alone ( /kg) WTP f evaluated together ( /kg) Impact on average WTP ( /kg) Results are very smlar for the Organc and IPM apples, both dffer from the regular. The conventonal apple s clearly the most affected when t s evaluated jontly wth the other two apples. Almost 5% of the partcpants (54) decrease ther wllngness to pay and 18 are not wllng to buy anymore. Although dfferent n sze (18 vs. 54), these two groups have almost the same mpact (-.14 and -.15 /kg) on the average decrease of the WTP for the regular apple (-.28 /kg). Roughly, one out of three partcpants (36) smply dd not change ther WTP, and ncreasng t appears anecdotal. Thngs are dfferent for the organc and IPM apples, for whch the most frequent response to a change n the choce set s to do nothng. The second most frequent response s a decrease n WTP. Almost no partcpant has chosen to stop buyng. Interestngly, ncreases n WTP may happen (13 cases for the organc apple and 15 for the IPM), whch suggests that some partcpants have consdered theses apples more favourably when they were confronted to substtutes. Fnally, t s worth notng that, for these two apples, the fnal mpact of the choce set on the average WTP s almost entrely due to a decrease n WTP. The framng of the evaluaton of ndvdual WTP may mpact the smulaton of market shares or demand functons used to buld marketng or publc polcy scenaros. To have a rough dea of ths mpact, cumulatve dstrbutons of WTP for each apple are shown n Fgure 1. Black dots are for WTP evaluated separately for each apple, and hollow crcles are used when evaluatons are made jontly for the three apples. In the left column, ndvduals are ranked accordng to ther WTP when apples are evaluated alone. Indvdual responses appear 17

19 WTP ( /kg) WTP ( /kg) qute heterogeneous. The man mpact of assessng WTP jontly s a decrease n WTP, clearly more frequent for the regular apple. In the rght column, cumulatve dstrbutons are drawn ndependently. Ths shows that demand curves drawn from jont evaluatons are below demand curves drawn from separate elctaton of WTP. Agan, the dfference between the two estmatons s much more pronounced for the regular apple than for the IPM and Organc, for whch demand curves are very smlar under both condtons. Fgure 1. Cumulatve dstrbuton of WTP when apples are evaluated alone or jontly "Jontly" sorted accordng to "alone" "Jontly" and "alone" sorted separately 4 Organc Evaluated alone Evaluated jontly 4 Organc Evaluated alone Evaluated jontly Demand Demand 4 IPM Evaluated alone Evaluated jontly 4 IPM Evaluated alone Evaluated jontly Demand Demand 4 Regular Evaluated alone Evaluated jontly 4 Regular Evaluated alone Evaluated jontly Demand Demand 18

20 Number of subjects Prevous results have shown a dversty of responses to changes n choce set's sze. A last queston s to know whether ths dversty s between or wthn ndvduals. Measurng ndvdual senstvty to dfferences n choce framng may brng some nsght nto that queston. Each ndvdual evaluated each apple 4 tmes: once alone, twce wth one other apple and once wth the two other apples. Comparng WTP of one apple evaluated alone to WTP when the apple s evaluated jontly wth other apples, produces 3 pars of WTPs per apple, thus a total of 9 pars for each partcpant. The two WTPs of each par can be dentcal or dfferent, whch allows to compute the total number of changes n WTP for each partcpant, rangng from (same WTP for an apple whatever the choce set) to 9 (WTP changes each tme the choce set s dfferent). Fgure 2 shows the dstrbuton of the 111 partcpants accordng to the number of changes n WTP. Fgure 2. Dstrbuton of partcpants accordng to ther number of changes n WTP Number of changes n WTP It appears that systematc unresponsveness to choce set s the behavour of a sgnfcant mnorty: 25 partcpants (22.5%) never changed ther WTPs. These subjects have a gven WTP for each apple (none of them had the same WTP for the 3 apples), and they never change t. Ths does not mean that they do not dscrmnate between apples: ther WTPs are dfferent and ncreasng from the regular to the IPM and the organc. Conversely, a sgnfcant number of partcpants (17) change ther WTP at each change of the choce set. The remanng 69 partcpants show some senstvty to the sze of the choce set, most of them change ther WTP systematcally for one apple (3 changes) or for two (6 changes). Soco-demographc 19

21 characterstcs of partcpants have no sgnfcant nfluence on the number of changes, except age (p=.3), older partcpants beng less senstve to the choce framng. 5. Concludng Comments In ths paper we proposed a new WTP elctaton procedure based on the BDM mechansm and allowng for consumer surplus maxmsaton. Ths Surplus Comparson Mechansm (SCM) has the advantage of focusng on comparatve effects n assessng the purchasng behavour of consumers when several products are tested smultaneously. Our emprcal work provdes orgnal results that justfy the use of ths mechansm, whle showng the operatonal valdty for lab experments. Ths expermental desgn, whch man objectve was to valdate the methodology, requested a sgnfcant cogntve effort, gong beyond what consumers usually do when they choose a product n a real market. Indeed, the exploraton of all possble choce stuatons durng the experment, and the need for consumers to mentally solate these choce sets, were admttedly demandng. However, the man result of ths lab experment (.e. the decrease of WTP accordng to the number of substtutes wthn the choce set) appears to be sgnfcant, n partcular when consderng the fact that consumers were ex-ante fully nformed on the products potentally avalable on the market. Therefore, there was no element of surprse when each choce set was proposed to the consumers (the surprse effect that often explans the decrease of WTP for conventonal products when nnovatve products reach the market or appear n an experment). Ths valdaton experment for SCM should now be replcated usng a between-group desgn. Therefore partcpants would not have to focus on the random potental draw of each market stuaton at the end of the sesson of the lab experment. There s lttle doubt that the decrease n the average WTP, based on the number of substtutes, would be much hgher than the one we obtaned n ths paper. Ths experment could be done usng the case studes we presented n the preamble of ths artcle, for example takng the dea that GMO products would obtan a much hgher WTP f GMO free products were not avalable on the market. These results have mplcatons for the development of publc polcy. If we return to the example of the labelng or the ban on the use of GMOs (Noussar et al, 24; Lusk et al, 25 for prevous studes) t s clear that the boycott observed on many markets for these products depends a lot on the presence of GMO free products. Hence publc polcy n some countres could be reconsdered: n terms of barrers to trade, market bans or food products labelng, to both denounce the presence of GMOs or certfy GMO free n Europe and the Unted States. 2

22 Consderng the scope of ths paper, the key challenge for certfed products on envronmental practces les n strengthenng or not the Mnmum Qualty Standards. Snce the conventonal producton would be banned from the market to force the adopton of IPM by farmers, the consequences n terms of consumer surplus could be largely modfed, and n ths case accountng for the actual choce set n the evaluaton of WTP s clearly a major ssue. If, as suggested by our study, the evcton of conventonal producton rather caused an ncrease n WTP for IPM and organc products, there would be a trade-off to make wth the drect effects of product dversty. 21

23 Appendx. Number of Partcpants and WTP by apple and choce set accordng to change n WTP when the choce set sze ncreases Apple and choce set Organc IPM Regular Subjects and WTP No change Number of subjects (1) WTP f no alternatve ( /kg) f 1 or 2 alternatves ( /kg) Number of subjects (2) WTP f no alternatve ( /kg) f 1 or 2 alternatves ( /kg) Decrease n WTP Number of subjects (3) WTP f no alternatve ( /kg) f 1 or 2 alternatves ( /kg) Number of subjects (4) WTP f no alternatve ( /kg) f 1 or 2 alternatves ( /kg) Increase n WTP Number of subjects (5) WTP f no alternatve ( /kg)... f 1 or 2 alternatves ( /kg) Number of subjects (6) WTP f no alternatve ( /kg) f 1 or 2 alternatves ( /kg) Total Number of subjects WTP f no alternatve ( /kg) f 1 or 2 alternatves ( /kg) (1) Number of subjects wth WTP= for a gven apple when there s no alternatve, and WTP= when there are alternatves. (2) Number of subjects wth WTP> for a gven apple when there s no alternatve, and constant when there are alternatves. (3) Number of subjects wth WTP> for a gven apple when there s no alternatve, and WTP= when there are alternatves. (4) Number of subjects wth WTP> for a gven apple when there s no alternatve, and lower when there are alternatves. (5) Number of subjects wth WTP= for a gven apple when there s no alternatve, and WTP> when there are alternatves. (6) Number of subjects wth WTP> for a gven apple when there s no alternatve, and hgher when there are alternatves. 22

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