Investigating Preference Misreporting in Induced-Value and Real-Good Second Price Auctions

The second-price auction (SPA) is a commonly used mechanism for eliciting consumer preferences and willingness-to-pay. Despite the theoretical incentive compatibility of SPAs, experimental evidence in induced-value settings documents significant departure of bids from true valuations. We conduct a laboratory experiment to investigate factors that drive this preference misreporting in induced-value SPAs (IVSPAs). Additionally, we include a homegrown value SPA (HGSPA) over two pecan products to investigate potential correlations in subjects’ bids between IVSPAs and HGSPAs. Our results show substantial deviation from optimal bidding in the IVSPA, with 62% underbidding and 30% overbidding. This misreporting is also significantly associated with induced-value and multiple demographic variables. Importantly, we find significant positive correlations in bidding behavior between the IVSPA and HGSPA. Our findings provide important insights to improve the design and implementation of SPAs and generate more accurate estimates of consumer valuations.