This study reports on the potential use of â€œcheap talkâ€ in hypothetical new product valuation research using a simple field experiment eliciting subjects' willingness to pay for a new product. While cheap talk has been used in the non-market valuation literature, its application in hypothetical new product valuation research is very limited.cheap talk

Robert G. Brummett

Rodolfo M. Nayga, Jr.

Ximing Wu

English

Research Papers in Economics

On the Use of Cheap Talk in New Product Valuation 
Robert G. Brummett
Texas AMUniversity
Rodolfo M. Nayga, Jr. Ximing Wu
Texas AMUniversity Texas AMUniversity
Abstract
This study reports on the potential use of “cheap talk” in hypothetical new product valuation
research using a simple field experiment eliciting subjects’ willingness to pay for a new
product. While cheap talk has been used in the non-market valuation literature, its application
in hypothetical new product valuation research is very limited.
Authors thank anonymous journal reviewers for helpful comments.
Citation: Brummett, Robert G., Rodolfo M. Nayga, Jr., and Ximing Wu, (2007) "On the Use of Cheap Talk in New Product
Valuation." Economics Bulletin, Vol. 2, No. 1 pp. 1-9
Submitted: February 1, 2007.  Accepted: May 8, 2007.
URL: http://economicsbulletin.vanderbilt.edu/2007/volume2/EB-07B40001A.pdf1. Introduction 
Due to rising interest in estimating demand for new product concepts, economists are 
increasingly conducting research that relies on surveys in which participants are paid to answer 
questions about hypothetical purchase decisions.  Because these studies are conducted in 
hypothetical situations with no purchase or consumption consequences for the participants, they 
are unable to uncover “true” preference structures.  For example, in contingent valuation studies, 
participants have been found to overstate the amount they are willing to pay for an increase in 
quality of a private good.  Evidence of this “hypothetical bias” is widespread (Cummings, 
Harrison and Rutstrom 1995; List and Gallet 2001; Loomis et al. 1997; Neill et al. 1994).  To 
counter such problems, some research has begun to investigate means of calibrating hypothetical 
studies to non-hypothetical results obtained in experimental setting (Blackburn, Harrison, and 
Rutstrom 1994; Fox et al. 1998; List, Margolis, and Shogren 1998).  Applications to new product 
valuation research of these ex post correction of hypothetical bias are limited, however, because 
extensive secondary data from actual markets are unavailable when dealing with proposed new 
product introductions.  Actual test marketing can be performed but these are expensive and 
should be conducted after some pre-market introduction research such as a consumer acceptance 
or willingness-to-pay (WTP) study.  In addition, results from previous research imply that 
calibration factors vary on a case-by-case basis and hence, a specific calibration factor must be 
determined for each study (Lusk 2003). 
An alternative method of reducing hypothetical bias is incorporating a “cheap talk” script 
that explains the problem of hypothetical bias to study participants prior to administration of a 
hypothetical question (Cummings and Taylor 1999).  The premise behind this technique is that 
one might be able to reduce or eliminate hypothetical bias by simply making respondents aware 
  1of it regardless of its underlying causes.  Lusk (2003) argued that the use of cheap talk is more 
general than calibration because it provides an ex ante bias correction. 
Murphy et al. (2005) performed a meta-analysis of 28 studies that utilized WTP.  Their 
findings indicate support of the generally held belief that hypothetical bias increases WTP values 
beyond what would likely be paid in non-hypothetical situations.  They found that calibration 
techniques, including cheap talk, were effective in mitigating the bias.  While many in the field 
tout the benefits of utilizing cheap talk to address hypothetical bias, others urge caution because 
the evidence on cheap talk’s robustness is mixed.  Aadland and Caplan (2005) conducted 
telephone surveys utilizing a generalized cheap talk script to see if a more neutral cheap talk was 
effective in addressing hypothetical bias across different types of goods.  Their study design 
incorporated a public good (curbside recycling) with private good attributes (reduced garbage 
fees, convenience, etc.).  Their cheap talk design did not reference higher hypothetical payment 
values as in Cummings and Taylor (1999) and List (2001).  They received mixed results in their 
study, finding that while hypothetical bias appears to exist, cheap talk may either mitigate or 
exacerbate the bias depending on its length, structure, and valence.  Other studies have also 
evaluated the effect of short versus long script.  Poe et al. (2002) found that a short script did not 
influence decisions.  List (2001), as noted above, reported that long script did not reduce 
hypothetical bias with experienced card dealers.  Brown et al. (2003) found that long cheap talk 
script was successful, but only for high payment amounts.   
In addition to the mixed results in the literature, cheap talk studies to date have been 
limited to mostly laboratory setting.  Cheap talk will be more valuable to researchers if it can be 
applied in field surveys or experiments.   
 
  22. Survey Design 
We conducted a field experiment utilizing grocery shoppers in different cities of Texas 
and elicited their WTP for a novel product in irradiated mangoes.  Food irradiation is a relatively 
new process from an adoption perspective and debate continues on its acceptability as a food 
process.  Irradiated mangoes, and for that matter, irradiated fruit in general is not currently 
available in most markets in the U.S.   
WTP was solicited from participants in the form of a payment card.  Values for the 
payment card were calculated from pre-tests and according to a method described by Rowe, 
Schulze, and Breffle (1996).  Respondents were informed of the average price of mangoes (50 
cent each), which was provided to us by a supermarket chain.  The categorical values used in the 
payment card were determined based on pre-tests and were calculated using the method 
described in Rowe, Schulze, and Breffle (1996).  Based on the pre-tests, we offered choices 
within the range of 0-50 cents and an option of “more than $0.50”.   
The study was conducted in grocery stores in major metropolitan areas of Texas in the 
late winter/early spring of 2006.  Subjects were informed about the food irradiation process.  In 
all, 352 individuals participated in our study.  However, due to incomplete responses, our study 
utilizes data from 304 participants (149 given cheap talk and 155 given no cheap talk script prior 
to WTP question). 
Our cheap talk script was similar to that used by Carlsson, Frykblom, and Lagerkvist 
(2004) and is more akin to the short versions that have been used in the past and not the long 
version used by List (2001) and Brown et al. (2003).  Murphy et al. (2005) indicates that 
hypothetical bias tends to be positive in nature.  Hence, we chose to maintain reference to this 
positive effect in our description of this bias.  The cheap talk script was as follows. 
  3“Previous studies indicate that, individuals in general respond to surveys in a different 
way than they act in the real life. It is quite common to find that individuals say they are 
willing to pay higher prices than those that they are really willing to pay.  We believe that 
this is due to the difficulty to calculate the exact impact of these higher expenses on the 
household economy. It is easy to be generous when in reality one does not need to pay 
more in the shop. I would then like to remind you that it is perfectly fine if you are not 
willing to pay any premium, given that paying extra for these irradiated mangoes will 
leave you with less disposable income for other products or savings. 
The average price for mangos in the past year was $0.50 each. 
How much more for each irradiated mango than this would you be willing to pay?” 
 
3. Results and Conclusion 
We regressed the WTP values on the variables of cheap talk (dummy variable for 
presence/absence) and control variables for income (greater than or less than $50,000), education 
(college degree or less than college degree), gender (dummy for male/female), and race (white – 
base, Hispanic, and all other races).  We also estimate the model using ordered logit as described 
in Cameron and Huppert (1989) and Boyle (2002).  The results are quite similar to the OLS 
estimates and hence are not reported here.  In particular, among the variables of interest, cheap 
talk and knowledge do not show statistically significant effect, while trust is seen to have a 
significant positive effect on the WTP.  Brown et al. (2003) reported that cheap talk script was 
successful for high payment amounts.  Hence, in addition to the OLS estimate, we also estimate 
the model using quantile regression to investigate the effect of cheap talk on various quantiles of 
the WTP distribution.  As shown in table 1, the cheap talk variable is not statistically significant 
  4across different models.  This result indicates that WTP values with and without cheap talk are 
not statistically different, suggesting the absence of cheap talk effects.  Because irradiated 
mangoes have yet to be made commercially available, the good was undeliverable and a non-
hypothetical treatment was not conducted.  We would have wanted to conduct a non-hypothetical 
treatment with actual product and payment involved.  This was not, however, possible because 
we could not find and acquire irradiated mangoes to use for the experiment during the conduct of 
the study.  Hence, while certainly possible, our finding cannot unequivocally be interpreted as 
implying that cheap talk cannot reduce hypothetical bias.  Our results simply imply that cheap 
talk script does not significantly reduce willingness to pay in the majority of our sample.  It is 
possible that hypothetical bias did not exist to begin with.  Our finding adds to the current debate 
of whether cheap talk, especially the short scripts used in the past, can really effectively reduce 
potential hypothetical bias.  However, our goal is to show the potential usefulness of cheap talk 
in hypothetical new product valuation research. 
The study of cheap talk is still in its infancy and the conditions in which cheap talk is 
effective at reducing hypothetical bias are not fully known (Lusk 2003).   While cheap talk has 
been used in the non-market valuation literature, its application in hypothetical new product 
valuation research is very limited.  Our study, which hopefully provides exposure to this topic, 
should be replicated for other products, other versions of cheap talk, and other elicitation 
mechanisms to test the robustness of our findings. 
 
4. References 
 
Aadland, D., Caplan, A.J., 2005. Cheap talk reconsidered: New evidence from CVM. Journal of 
Economic Behavior & Organization, in press. doi:10.10161/j.jebo.2004.09.006. 
  5Brown, T.C., Ajzen, I., Hrubes, D., 2003. Further tests of entreaties to avoid hypothetical bias in 
referendum contingent valuation.  Journal of Environmental Economics and Management 
46, 353-361. 
Blackburn, M., Harrison, G., Rustrom, E., 1994. Statistical bias functions and informative 
hypothetical surveys. American Journal of Agricultural Economics 76, 1084-1088. 
Boyle, K.J., 2002. Contingent Valuation in Practice in A Primer on Nonmarket Valuation, 
Champ P.A., Boyle K.J. and Brown T.C. (ed.). Kluwer Academic Publishers. 
Carlsson, F., Frykblom, P., Lagerkvist, C.J., 2005. Using cheap talk as a test of validity in choice 
experiments. Economics Letters 89, 147-152. 
Cameron, T.A., Huppert, D.D., 1989, OLS versus ML Estimation of Non-Market Resource 
Values with Payment Card Interval Data. Journal of Environmental Economics and 
Management, 17, 230-246. 
Cummings, R.G., Harrison, G.W., Rustrom, E.E., 1995. Homegrown value and hypothetical 
surveys: Is the dichotomous choice approach incentive-compatible? American Economic 
Review 85, 260-266. 
Cummings, R.G., Taylor, L.O., 1999. Unbiased value estimates for environmental goods: A 
cheap talk design for the contingent valuation method. The American Economic Review 
89,3, 649-665. 
Fox, J.A., Shogren, J.F., Hayes, D.J., Kliebenstein, J.B., 1998. CVM-X:  Calibrating contingent 
values with experimental auction markets.  American Journal of Agricultural Economics 
80, 455-465. 
Hayes, D.J., Fox, J.A., Shogren, J.F., 2002. Experts and activists: how information affects the 
demand for food irradiation. Food Policy 27, 185-193. 
  6List, J.A., 2001. Do explicit warnings eliminate the hypothetical bias in elicitation procedures?  
Evidence from field auctions for sportscards. The American Economic Review 91,5, 
1498-1507. 
List, J.A., Gallet, C.A., 2001. What experimental protocol influence disparities between actual 
and hypothetical stated values?  Environmental and Resource Economics 20, 241-254. 
List, J.A., Margolis, M., Shogren, J.F., 1998. Hypothetical-actual bid calibration of a multigood 
auction.  Economics Letters 60, 263-268. 
Loomis, J., Brown, T., Lucero, B., Peterson, G., 1997. Evaluating the validity of the 
dichotomous choice question format in contingent valuation.  Environmental and 
Resource Economics 10, 109-123. 
Lusk, J.L., 2003. Effects of cheap talk on consumer willingness-to-pay for golden rice.”,  
American Journal of Agricultural Economics 85, 840-856. 
Murphy, J.J., Allen, P.G., Stevens, T.H., Weatherhead, D., 2005. A meta-analysis of hypothetical 
bias in stated preference valuation. Environmental and Resource Economics 30, 313-325. 
Neill, H.R., Cummings, R.G., Ganderton, P.T., Harrison, G.W., McGuckin, T., 1994. 
Hypothetical surveys and real economic commitments.  Land Economics 70, 145-154. 
Poe, G., Clark, J.E., Rondeau, D., Schulze, W.D., 2002. Provision point mechanisms and field 
validity tests of contingent valuation.  Environmental and Resource Economics 23, 105-
131. 
Rowe, R.D., Schulze, W.D., Breffle, W.S., 1996. A test for payment card biases. Journal of 
Environmental Economics and Management 31, 178-185. 
  7Table 1. WTP OLS and Quantile Regression Models 
Variable  OLS  Q1 Q2 Q3 
Cheap Talk 
(1 if included) 
-.0232 
(.0234) 
-.0245 
(.0174) 
-.0056 
(.0126) 
-.0071 
(.0527) 
Trust 
(1 if trust; 0 otherwise) 
.1265* 
(.0246) 
.0894* 
(.0179) 
.1639* 
(.0133) 
.1714* 
(.0555) 
Knowledge 
(1 if knowledgeable, 0 
otherwise) 
-.0004 
(.0271) 
.0014 
(.0204) 
-.0056 
(.0146) 
-.0243 
(.0630) 
Participant Age  -.0015* 
(.0009) 
-.0008 
(.0006) 
-.0006 
(.0004) 
-.0025 
(.0020) 
Participant Gender 
(1 if female) 
.0564* 
(.0270) 
.0388* 
(.0195) 
.0409* 
(.0146) 
.0914 
(.0626) 
Hispanic Race  .0873* 
(.0298) 
.0205 
(.0224) 
.0875* 
(.0162) 
.1793* 
(.0665) 
Other Race  .0110 
(.0309) 
.0011 
(.0239) 
-.0060 
(.0164) 
-.0075 
(.0673) 
Income 
(1 if > $50,000/yr.) 
.0307 
(.0252) 
.0126 
(.0183) 
.0183 
(.0136) 
.0196 
(.0593) 
Education 
(1 if College Degree or 
higher) 
-.0382 
(.0257) 
-.0278 
(.0194) 
-.0130 
(.0138) 
-.0377 
(.0602) 
Constant .0412 
(.0570) 
-.0727 
(.0409) 
-.0716 
(.0308) 
.1428 
(.1362) 
R
2 .1483 .0429 .1261 .1001 
* denotes statistical significance at 0.05 level.  Standard errors are in parentheses. 
Q1, Q2 and Q3: Quantile regression at the first, second and third quartile. 
 
 
  8

A meta-analysis of hypothetical bias in stated preference valuation.

A test for payment card biases.

Cheap talk reconsidered: New evidence from CVM.

CVM-X: Calibrating contingent values with experimental auction markets.

Do explicit warnings eliminate the hypothetical bias in elicitation procedures? Evidence from field auctions for sportscards.

Effects of cheap talk on consumer willingness-to-pay for golden rice.”,

Evaluating the validity of the dichotomous choice question format in contingent valuation.

Experts and activists: how information affects the demand for food irradiation.

Further tests of entreaties to avoid hypothetical bias in referendum contingent valuation.

Homegrown value and hypothetical surveys: Is the dichotomous choice approach incentive-compatible?

Hypothetical surveys and real economic commitments.

Hypothetical-actual bid calibration of a multigood auction.

OLS versus ML Estimation of Non-Market Resource Values with Payment Card Interval Data.

Provision point mechanisms and field validity tests of contingent valuation.

Statistical bias functions and informative hypothetical surveys.

Unbiased value estimates for environmental goods: A cheap talk design for the contingent valuation method.

Using cheap talk as a test of validity in choice experiments.

What experimental protocol influence disparities between actual and hypothetical stated values?

On the Use of Cheap Talk in New Product Valuation

http://www.accessecon.com/pubs/EB/2007/Volume2/EB-07B40001A.pdf

On the Use of Cheap Talk in New Product Valuation

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