Saturday, October 9, 2010

Experimental auctions


Dr. Matty Demont says that experimental auctions are fun to do. Since 2007, AfricaRice in Saint Louis, Senegal has been doing them to find out how much consumers are willing to pay for high-quality rice. This is one of the first experimental auctions on rice in a developing country. Experimental auctions may be fun, but they are also an important research tool and a big improvement over traditional surveys, which simply ask people how much they would pay for a new product. But people tend to under- or overestimate such hypothetical prices. An experimental auction creates a market in a laboratory setting which is more accurate than a questionnaire.

 How it works. A female researcher invites participants (women on their way to or from a nearby market) to come into a youth center. The session takes two hours, and the women are compensated for their time with 3000 FCFA ($6.67). They are also given an “endowment” of a kilo of conventional local market rice.

Then the women bid on improved rice: imported rice, and rice from PINORD, a producers’ association, that produces high quality local rice, sold under the brand name Rival (Riz de la Vallée). Ten women are in each session. The researchers ask them how much they would pay to upgrade their ordinary rice, i.e. to exchange it for the imported and for the Rival rice. The women sit at tables, so they can see each other, but they whisper their bids to the auctioneer, so they bid in secret. The highest bidder wins, but she pays the price stated by the second highest bidder. This is called a “second price auction” and it ensures a more realistic, less conservative price than if the top bid pays the top price.

The results. Relative to conventional local rice, consumers in Saint-Louis and Dakar are willing to pay 32% more for local, high-quality rice, and even 38% if they see the label. In other words the women are willing to pay a price premium for high-quality local rice, even more so if they see the label identifying the rice as local.

In fact, the price premium that consumers will pay for quality local rice is almost twice the premium of 17% they are typically paying for imported rice. The research confirms that good, local rice is competitive with imports, especially if it is attractively packaged and labeled.

Adding value. Dr. Demont hopes that the research will help African farmers and processers learn more about their market, and help them to see that the negative image of local rice can be overcome by producing a high-quality product. The next step will be to strengthen the local rice value chains so that all involved produce the high quality local rice that consumers want.

The team for this research includes Dr. Matty Demont (AfricaRice agricultural economist), Maimouna Ndour (AfricaRice sociology assistant), Pieter Rutsaert (PhD student, Ghent University, Belgium) and Prof. Wim Verbeke (Professor, Ghent University, Belgium).