5 ms·

"Asking people what they’d pay for and how much rarely works." Yes, asking a person about what he or she is willing to pay _hypothetically_ doesn't work. But t

"Asking people what they’d pay for and how much rarely works." Yes, asking a person about what he or she is willing to pay _hypothetically_ doesn't work. But there are numerous scientific studies that show that using a Vickrey auction, similar to Google's ad auction mechanism, can elicit a person's maximum willingness-to-pay. In fact, it's one of the reasons why William Vickrey won the Nobel Prize in Economic Sciences. The primary reason why you would reveal your maximum willingness-to-pay in a Vickrey auction is because you know beforehand that if you win the auction, you won't have to pay your own bid——you always pay less than your own bid as a winner. How much less is up to the auctioneer but in all cases it's less than your own bid. The pay-what-you-want mechanism cannot reveal how much a person values a product or service because there's such a strong financial incentive to simply state a low amount. Disclaimer: I'm the co-founder of Veylinx, a platform to measure maximum willingness-to-pay of users using Vickrey auctions.

jasode 8y ago
>But there are numerous scientific studies that show that using a Vickrey auction, [...], can elicit a person's maximum willingness-to-pay. Yes, but participating in an auction is a concrete action to "commit to pay" -- and therefore not what the author is talking about. The context of the author's quote you extracted ("asking people what they'd pay"†) is about abstract notions of what consumers think they would pay; e.g. gathering hypotheticals of prices from marketing efforts like customer surveys or focus groups. Surveys and focus groups have no real money payment commitments. Auctions do. † author also wrote a few sentences later: "When it comes to money, people are unable to predict accurately whether they’d pay or not. It’s much easier to spend hypothetical dollars than real ones."
- aelhaji 8y ago
  I agree that skin in the game matters. But my point is a bit more subtle. Imagine the following situation: I present you a new product and I'm going to ask you how much you're willing to pay for it. Let's agree that you'll pay the amount you mention dependent on the flip of a coin. Even though you clearly have have committed to potentially paying real money, this method won't reveal what I really want to know: your true perceived value of the product (maximum willingness-to-pay). The Vickrey auction solves this problem.
  - jakelazaroff 8y ago
    I'm not familiar with Vickrey auctions; can you explain how they solve the problem the author is referring to?
    - rahimnathwani 8y ago
      With eBay proxy bidding, you tell eBay what the maximum is you are willing to pay. Then, if you win the auction, you don't pay your maximum. You pay just above the maximum amount of the bidder you beat (i.e. the person who would have won if you hadn't participated). So, how should you bid if you are a rational person? You should bid the maximum you are willing to pay. As there is zero chance that you will pay more than you needed: you will always pay just enough to beat the second place bidder. So, the incentive is such that you reveal your maximum price to eBay.
      - aelhaji 8y ago
        The eBay application isn't really appropriate because eBay always reveals the highest bid, which removes the incentive to reveal if you have a lower willingness-to-pay. A pure application of the Vickrey auction gives all participants an incentive to reveal their maximum willingness-to-pay.
        rahimnathwani 8y ago
        "eBay always reveals the highest bid, which removes the incentive to reveal if you have a lower willingness-to-pay" I don't understand how it removes the incentive? Would you mind going into more detail? (I ask because I believe I am rational when I place eBay bids, and I always choose the actual maximum I'm willing to pay.)
        aelhaji 8y ago
        Let's say that the first bidder placed as a proxy bid $100 but eBay only shows $1. This will already exclude everyone who has a maximum-willingness-to-pay lower than or equal to $1. A second bidder might put as a proxy bid $120. This wil result in eBay setting the highest bid at $101. At that price nobody with a maximum willingness-to-pay lower than or equal to $101 will reveal their max. The Vickrey auction doesn't reveal anyone's bid and, thus, you collect a lot more bids (demand curve data). I agree with you, however, that the eBay mechanism results in the same person winning the auction.
- clairity 8y ago
  auctions also put up pyschological barriers for some customer segments, so aren't always the best choice. another (classic) alternative is conjoint analysis: https://en.wikipedia.org/wiki/Conjoint_analysis_(marketing) https://en.wikipedia.org/wiki/Conjoint_analysis_(marketing) it's difficult to do well, but will reveal willingness-to-pay without requiring the commitment of real dollars.
gmiller123456 8y ago
"But there are numerous scientific studies that show that using a Vickrey auction, similar to Google's ad auction mechanism, can elicit a person's maximum willingness-to-pay." Sounds like a catch-22 situation, how did these studies determine they actually measured a person's maximum willinges-to-pay? Even when a person has decided what their maximum is, there are many known sales tactics that can increase it beyond what the buyer initially decided. Some, like bait-and-switch are so effective that they're outlawed. So, it'd be really interesting to hear how these studies actually determined they actually measured what they said they did.
- aelhaji 8y ago
  It's done with so-called value induced auctions. In this type of auction you simply bid on a voucher that's worth $x dollars, where x is different for each participant. Theory predicts that your bid should be $x (your maximum willingness-to-pay). Considering value is induced, researchers know both the prediction and the observation, and calculating the difference determines the 'truth revealing efficiency' of an auction. See for example: https://www.sciencedirect.com/science/article/pii/S0167268101001652 https://www.sciencedirect.com/science/article/pii/S016726810...

jasode 8y ago

>But there are numerous scientific studies that show that using a Vickrey auction, [...], can elicit a person's maximum willingness-to-pay. Yes, but participating in an auction is a concrete action to "commit to pay" -- and therefore not what the author is talking about. The context of the author's quote you extracted ("asking people what they'd pay"†) is about abstract notions of what consumers think they would pay; e.g. gathering hypotheticals of prices from marketing efforts like customer surveys or focus groups. Surveys and focus groups have no real money payment commitments. Auctions do. † author also wrote a few sentences later: "When it comes to money, people are unable to predict accurately whether they’d pay or not. It’s much easier to spend hypothetical dollars than real ones."

aelhaji 8y ago
I agree that skin in the game matters. But my point is a bit more subtle. Imagine the following situation: I present you a new product and I'm going to ask you how much you're willing to pay for it. Let's agree that you'll pay the amount you mention dependent on the flip of a coin. Even though you clearly have have committed to potentially paying real money, this method won't reveal what I really want to know: your true perceived value of the product (maximum willingness-to-pay). The Vickrey auction solves this problem.
- jakelazaroff 8y ago
  I'm not familiar with Vickrey auctions; can you explain how they solve the problem the author is referring to?
  - rahimnathwani 8y ago
    With eBay proxy bidding, you tell eBay what the maximum is you are willing to pay. Then, if you win the auction, you don't pay your maximum. You pay just above the maximum amount of the bidder you beat (i.e. the person who would have won if you hadn't participated). So, how should you bid if you are a rational person? You should bid the maximum you are willing to pay. As there is zero chance that you will pay more than you needed: you will always pay just enough to beat the second place bidder. So, the incentive is such that you reveal your maximum price to eBay.
    - aelhaji 8y ago
      The eBay application isn't really appropriate because eBay always reveals the highest bid, which removes the incentive to reveal if you have a lower willingness-to-pay. A pure application of the Vickrey auction gives all participants an incentive to reveal their maximum willingness-to-pay.
      - rahimnathwani 8y ago
        "eBay always reveals the highest bid, which removes the incentive to reveal if you have a lower willingness-to-pay" I don't understand how it removes the incentive? Would you mind going into more detail? (I ask because I believe I am rational when I place eBay bids, and I always choose the actual maximum I'm willing to pay.)
        aelhaji 8y ago
        Let's say that the first bidder placed as a proxy bid $100 but eBay only shows $1. This will already exclude everyone who has a maximum-willingness-to-pay lower than or equal to $1. A second bidder might put as a proxy bid $120. This wil result in eBay setting the highest bid at $101. At that price nobody with a maximum willingness-to-pay lower than or equal to $101 will reveal their max. The Vickrey auction doesn't reveal anyone's bid and, thus, you collect a lot more bids (demand curve data). I agree with you, however, that the eBay mechanism results in the same person winning the auction.
clairity 8y ago
auctions also put up pyschological barriers for some customer segments, so aren't always the best choice. another (classic) alternative is conjoint analysis: https://en.wikipedia.org/wiki/Conjoint_analysis_(marketing) https://en.wikipedia.org/wiki/Conjoint_analysis_(marketing) it's difficult to do well, but will reveal willingness-to-pay without requiring the commitment of real dollars.

gmiller123456 8y ago

"But there are numerous scientific studies that show that using a Vickrey auction, similar to Google's ad auction mechanism, can elicit a person's maximum willingness-to-pay." Sounds like a catch-22 situation, how did these studies determine they actually measured a person's maximum willinges-to-pay? Even when a person has decided what their maximum is, there are many known sales tactics that can increase it beyond what the buyer initially decided. Some, like bait-and-switch are so effective that they're outlawed. So, it'd be really interesting to hear how these studies actually determined they actually measured what they said they did.

aelhaji 8y ago
It's done with so-called value induced auctions. In this type of auction you simply bid on a voucher that's worth $x dollars, where x is different for each participant. Theory predicts that your bid should be $x (your maximum willingness-to-pay). Considering value is induced, researchers know both the prediction and the observation, and calculating the difference determines the 'truth revealing efficiency' of an auction. See for example: https://www.sciencedirect.com/science/article/pii/S0167268101001652 https://www.sciencedirect.com/science/article/pii/S016726810...