Auctions as Collusion Devices

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Auctions as Collusion Devices

Author Info

Maarten C.W. Janssen () (Faculty of Economics, Erasmus University Rotterdam)

Abstract

This paper develops an economic argument relating auctions to high market prices. At the core of the argument is the claim that market competition and bidding in an auction should be analyzed as part of one game, where the pricing strategies in the market subgame depend on the bidding strategies during the auction.I show that the only equilibrium in the overall game that is consistent with the logic of forward induction is the one where firms bid an amount (almost) equal to the profits of the cooperative market outcome and follow a cooperative pricing strategy in the market game resulting in high prices.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-017/1.

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Date of creation: 19 Feb 2003
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Handle: RePEc:dgr:uvatin:20030017

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Find related papers by JEL classification:
L50 - Industrial Organization - - Regulation and Industrial Policy - - - General

This paper has been announced in the following NEP Reports:

NEP-ALL-2003-04-27 (All new papers)
NEP-COM-2003-04-27 (Industrial Competition)
NEP-IND-2003-04-27 (Industrial Organization)
NEP-MIC-2003-04-29 (Microeconomics)

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van Damme, Eric, 1989. "Stable equilibria and forward induction," Journal of Economic Theory, Elsevier, vol. 48(2), pages 476-496, August. [Downloadable!] (restricted)
Other versions:
- van Damme,Eric, 1987. "Stable equilibria and forward induction," Discussion Paper Serie A 128, University of Bonn, Germany.
Jacob K. Goeree, 2000. "Bidding for the Future," Virginia Economics Online Papers 346, University of Virginia, Department of Economics. [Downloadable!]
Ken Binmore & Paul Klemperer, 2001. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licenses," Economics Papers 2002-W4, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001. [Downloadable!]
Other versions:
- Binmore, Kenneth & Klemperer, Paul, 2002. "The Biggest Auction Ever: The Sale of the British 3G Telecom Licences," CEPR Discussion Papers 3214, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Ken Binmore & Paul Klemperer, 2002. "The Biggest Auction Ever: the Sale of the British 3G Telecom Licences," Economic Journal, Royal Economic Society, vol. 112(478), pages C74-C96, March. [Downloadable!] (restricted)
Rubinstein, Ariel, 1991. "Comments on the Interpretation of Game Theory," Econometrica, Econometric Society, vol. 59(4), pages 909-24, July. [Downloadable!] (restricted)
Jehiel, Philippe & Moldovanu, Benny & Stacchetti, Ennio, 1996. "How (Not) to Sell Nuclear Weapons," American Economic Review, American Economic Association, vol. 86(4), pages 814-29, September. [Downloadable!] (restricted)
Other versions:
- ehiel, Philippe & Benny Moldovanu & Ennio Stacchetti, 1994. "How (not) to sell nuclear weapons," Discussion Paper Serie B 288, University of Bonn, Germany.
Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter. [Downloadable!] (restricted)
Other versions:
- Klemperer, Paul, 2000. "What Really Matters in Auction Design," CEPR Discussion Papers 2581, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Professor Paul Klemperer, 2000. "What Really Matters in Auction Design," Microeconomics 0004008, EconWPA. [Downloadable!]
Kohlberg, Elon & Mertens, Jean-Francois, 1986. "On the Strategic Stability of Equilibria," Econometrica, Econometric Society, vol. 54(5), pages 1003-37, September. [Downloadable!] (restricted)
Theo Offerman & Jan Potters, 2000. "Does Auctioning of Entry Licenses affect Consumer Prices? An Experimental Study," Tinbergen Institute Discussion Papers 00-046/1, Tinbergen Institute. [Downloadable!]
Other versions:
- Offerman, T. & Potters, J., 2000. "Does auctioning of entry licenses affect consumer prices? : an experimental study," Discussion Paper 53, Tilburg University, Center for Economic Research. [Downloadable!]
Philippe Jehiel & Benny Moldovanu, 1996. "Strategic Nonparticipation," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 84-98, Spring. [Downloadable!] (restricted)
Other versions:
- Jehiel, Philippe & Benny Moldovanu, 1994. "Strategic Non-Participation," Discussion Paper Serie B 287, University of Bonn, Germany.

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