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Bidding rings and the winner's curse

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  • Ken Hendricks
  • Robert Porter
  • Guofu Tan

Abstract

This article extends the theory of legal cartels to affiliated private value and common value environments. We show that efficient collusion is always possible in private value environments, but may not be in common value environments with a binding reserve price. In the latter case, collusion does more than simply transfer rents from the seller to the buyers, it also gives buyers a chance to pool their information prior to trade and make an efficient investment decision. However, full efficiency may not be compatible with information revelation. Buyers with high signals may be better off if no one colludes, leading to inefficient trade. This result provides a possible explanation for the low incidence of joint bidding, especially on marginal tracts, in U.S. federal government offshore oil and gas lease auctions. Copyright (c) 2008, RAND.

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Bibliographic Info

Article provided by RAND Corporation in its journal The RAND Journal of Economics.

Volume (Year): 39 (2008)
Issue (Month): 4 ()
Pages: 1018-1041

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Handle: RePEc:bla:randje:v:39:y:2008:i:4:p:1018-1041

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Cited by:
  1. Forges, Françoise & Orzach, Ram, 2011. "Core-stable rings in second price auctions with common values," Journal of Mathematical Economics, Elsevier, vol. 47(6), pages 760-767.
  2. Omer Biran, 2013. "Strategic collusion in auctions with externalities," Theory and Decision, Springer, Springer, vol. 75(1), pages 117-136, July.
  3. Biran, Omer, 2011. "Mécanismes d'échange en présence d'externalités," Economics Thesis from University Paris Dauphine, Paris Dauphine University, Paris Dauphine University, number 123456789/7238 edited by Forges, Françoise.
  4. Beshears, John, 2013. "The performance of corporate alliances: Evidence from oil and gas drilling in the Gulf of Mexico," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(2), pages 324-346.
  5. Haile, Philip & Hendricks, Kenneth & Porter, Robert, 2010. "Recent U.S. offshore oil and gas lease bidding: A progress report," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 28(4), pages 390-396, July.

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