Bidder motives in cause-related auctions

Abstract

We study cause-related auctions where a percentage of the dynamically determined purchase price of an item is donated to charity. Little is known about the effectiveness of such auctions. Bidders who value donations to charity have an incentive to bid more aggressively in such auctions. Regardless of whether they win or not, these bidders can significantly affect prices. The purpose of this paper is to study bidders' willingness to pay a premium in charity auctions and the drivers that affect the charity premium. We use a carefully designed field experiment involving simultaneous pairs of auctions that are identical in all respects but percentage of the proceeds donated to charity. This design gives us the ability to look at bidder choice among auctions based on charitable considerations. We use a mixture model approach to allow for different types of individual preferences. We find that individuals fall into three segments: two altruistic segments and a selfish segment. The altruistic segments, which drive up the charity premium, can be classified as warm glow bidders who derive pleasure from the act of giving and other-regarding bidders who give for selfless reasons. Results show that the difference in donation percentages is the major factor influencing the charitable premium. However, bidders differ considerably in their responses to donation percentages. While other-regarding bidders tend to seek auctions where a greater percentage of revenue is donated to charity, warm glow bidders only contribute when the charity premium is sufficiently low. Thus, managers should focus their marketing efforts on appealing to these different segments, depending on the percentage donated to charity.

Introduction

Charitable giving has significantly increased in the past decade. Internet charity auctions are on the rise, in particular, with eBay dedicating a special section for charity auctions. Not only do these auctions play an important role for non-profit organizations, but an increasing number of firms are sponsoring these events in order to establish themselves as good corporate citizens. In turn, sponsorship of social causes may improve a firm's image or profits (Lichtenstein et al., 2004, Navarro, 1988, Varadarajan and Menon, 1988).²

While charitable auctions are an important fund-raising tool, little is known about their effectiveness or about participants' bidding behavior and charitable intent. Theoretical work (e.g., Engers and McManus, 2007, Ettinger, 2003, Goeree et al., 2005) has investigated the properties of different formats of charity auctions under the assumption that bidders care about the charity's revenue. The general result is that private benefits from charitable giving can translate into a “charity premium,” an increase in auction revenue resulting from charitable donations.

Unlike non-charity auctions, where careful analysis of bids can reveal preference for the item being auctioned, the decision to bid in charity auctions also relates to an individual's altruistic preference for donation. To identify the altruistic component separate from a bidder's valuation of the item, we focus on the endogenous choice between auctions with different donation percentages.³ We have designed a novel way to measure bidders' charitable intent.

With the exception of empirical works by Ku, Malhotra, and Murnighan (2005) on competitive arousal and Isaac and Schnier (2005) on jump bidding, extant empirical research on charity auctions has focused on identifying the optimal auction format (Carpenter et al., 2008, Salmon and Isaac, 2006). In contrast to past literature, we study the case where bidders are faced with a choice between identical simultaneous product auctions with different percentages donated to charity.

One key issue relates to individual selfish optimization in charity auction settings. This is a basic underlying assumption in analysis of non-charity auctions, and it is interesting to see whether it holds in charity auctions. It is plausible that not all individuals will behave in a manner consistent with seeking the best deal when faced with the decision to bid in a charity or non-charity auction for the same good (Engers and McManus, 2007, Ettinger, 2003, Salmon and Isaac, 2006). One reason that bidders might not be fully sensitive to price is due to charitable considerations. They may have a genuine concern for the well-being of others. This type of motive is often referred to as pure altruism (Becker, 1974, Lehmann, 2001). According to the model of pure altruism, an individual derives utility from the well-being of others regardless of the source of funding. This model may explain charitable giving, but it may also predict a substantial crowding out of an individual's own donations due to additional contributions by others (Roberts, 1984). However, individuals may also donate for other reasons (Fisher et al., 2008, Hill and Watkins, 2009), such as utility from the act of giving itself. This is known as warm glow (Andreoni, 1989, Konow, 2004, Eckel et al., 2005). The warm glow may arise because individuals think they are observed by others (Glazer and Konrad, 1996, Romano and Yildirim, 2001) or as a signal of social status (Rose-Ackerman, 1996, Glazer and Konrad, 1996).

In field data, where valuations cannot be observed, alternative utility specifications are typically very difficult to extract. However, in the present setting, we can make some inferences about individual preferences based on choices among competing auctions. We identify different segments of bidders based on their bidding behavior in charity and non-charity auctions. We find a non-charitable segment and two charitable segments, corresponding to both warm glow and other-regarding altruism, willing to pay a significant price premium for auctions involving charitable donations.