Favouritism and cartel disruption in first-price auctions
AbstractThe seller in an auction will generally not be happy to know that a cartel of bidders will take part in that auction. Cartels generate their profits by inducing a final price which is lower (higher in the case of procurement contracts' auctions) than in a competitive auction. This paper proposes a solution to the problem. By allowing the seller to cheat on the auction rules, and to allocate the good to a given bidder with a predetermined probability (favouritism), we show that when no cartel is active, the auction leads to a lower price than that obtained in a purely competitive auction. However, if a cartel is operative, favouritism generates incentives for the favoured bidder to defect the cartel. This single defection is sufficient to disrupt the cartel. In equilibrium, the seller may choose this probability of cheating so as to obtain the highest possible final auction price, which we show to be a second-best outcome. In other words, this proposed solution to the cartel's existence does not lead to a final auction price as high as that obtained in a competitive auction.
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Bibliographic InfoPaper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 15.
Length: 27 pages
Date of creation: Apr 2004
Date of revision:
First-price auctions; collusion; cartels;
Find related papers by JEL classification:
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-COM-2005-04-16 (Industrial Competition)
- NEP-MIC-2005-04-16 (Microeconomics)
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