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Strategic Collusion in Auctions with Externalities

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  • Omer Biran

    ()
    (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX)

Abstract

We study a first price auction preceded by a negotiation stage, during which bidders may form a bidding ring. We prove that in the absence of external effects the all-inclusive ring forms in equilibrium, allowing ring members to gain the auctioned object for a minimal price. However, identity dependent externalities may lead to the formation of small rings, as often observed in practice. Potential ring members may condition their participation on high transfer payments, as a compensation for their expected (negative) externalities if the ring forms. The others may therefore profitably exclude such "demanding" bidders, although risking tougher competition in the auction. We also analyze ring inefficiency in the presence of externalities, showing that a ring may prefer sending an inefficient member to the auction, if the efficient member exerts threatening externalities on bidders outside the ring, which in turn leads to a higher winning price.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00505477.

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Date of creation: 23 Jul 2010
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Handle: RePEc:hal:wpaper:hal-00505477

Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00505477/en/
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Web page: http://hal.archives-ouvertes.fr/

Related research

Keywords: Auctions; collusion; externalities; bargaining; sub-game perfect Nash equilibrium;

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Cited by:
  1. Omer Biran & Francoise Forges, 2010. "Core-stable Rings in Auctions with Independent Private Values," CESifo Working Paper Series 3067, CESifo Group Munich.
  2. Biran, Omer, 2011. "Core stable bidding rings in independent private value auctions with externalities," MPRA Paper 32164, University Library of Munich, Germany.

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