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Collusion and Information Revelation in Auctions

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  • Llorente-Saguer, Aniol
  • Zultan, Ro'i

Abstract

The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. However, such analyses neglect to consider the effects of failed collusion attempts, wherein information revealed in the negotiation process may affect bidding behavior. We experimentally test a setup in which theory predicts no collusion and no information revelation in first-price auctions. The results reveal a hitherto overlooked failing of the first-price mechanism: failed collusion attempts distort bidding behavior, resulting in a loss of seller revenue and efficiency. Moreover, the first-price mechanism does not result in less collusion than the second-price mechanism. We conclude that, while the features of the first-price mechanism may have the potential to deter bidder collusion, the role of beliefs in guiding bidding behavior make it highly susceptible to distortions arising from the informational properties of collusive negotiation. Auction designers should take this phenomenon into account when choosing the auction mechanism.

Suggested Citation

  • Llorente-Saguer, Aniol & Zultan, Ro'i, 2017. "Collusion and Information Revelation in Auctions," CEPR Discussion Papers 11944, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11944
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    3. Sven Fischer & Werner Güth & Todd R. Kaplan & Ro'i Zultan, 2014. "Auctions and Leaks: A Theoretical and Experimental Investigation," Jena Economics Research Papers 2014-027, Friedrich-Schiller-University Jena.
    4. Sangha, Kamaljit K. & Preece, Luke & Villarreal-Rosas, Jaramar & Kegamba, Juma J. & Paudyal, Kiran & Warmenhoven, Tui & RamaKrishnan, P.S., 2018. "An ecosystem services framework to evaluate indigenous and local peoples’ connections with nature," Ecosystem Services, Elsevier, vol. 31(PA), pages 111-125.
    5. Dechenaux, Emmanuel & Mago, Shakun D., 2019. "Communication and side payments in a duopoly with private costs: An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 165(C), pages 157-184.
    6. Cerrone, Claudia & Hermstrüwer, Yoan & Robalo, Pedro, 2021. "Debarment and collusion in procurement auctions," Games and Economic Behavior, Elsevier, vol. 129(C), pages 114-143.
    7. Pacharasut Sujarittanonta & Ajalavat Viriyavipart, 2021. "Deterring collusion with a reserve price: an auction experiment," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 536-557, June.
    8. Agranov, Marina & Yariv, Leeat, 2018. "Collusion through communication in auctions," Games and Economic Behavior, Elsevier, vol. 107(C), pages 93-108.

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    More about this item

    Keywords

    Auctions; Collusion; Experiment;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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