Strategic Collusion in Auctions with Externalities
AbstractWe 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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Date of creation: 23 Jul 2010
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Auctions; collusion; externalities; bargaining; sub-game perfect Nash equilibrium;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-06 (All new papers)
- NEP-COM-2010-08-06 (Industrial Competition)
- NEP-GTH-2010-08-06 (Game Theory)
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- Omer Biran, 2011.
"Core stable bidding rings in independent private value auctions with externalities,"
- 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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