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Bidding Rings and the Winner's Curse: The Case of Federal Offshore Oil and Gas Lease Auctions

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  • Ken Hendricks
  • Robert Porter
  • Guofu Tan

Abstract

This paper extends the theory of legal cartels to affiliated private value and common value environments, and applies the theory to explain joint bidding patterns in U.S. federal government offshore oil and gas lease auctions. We show that efficient collusion is always possible in private value environments, but may not be in common value environments. In the latter case, fear of the winner's curse can cause bidders not to bid, which leads to inefficient trade. Buyers with high signals may be better off if no one colludes. The bid data is consistent with oil and gas leases being common value assets, and with the prediction that the winner's curse can prevent rings from forming on marginal tracts.

Suggested Citation

  • Ken Hendricks & Robert Porter & Guofu Tan, 2003. "Bidding Rings and the Winner's Curse: The Case of Federal Offshore Oil and Gas Lease Auctions," NBER Working Papers 9836, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9836
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    References listed on IDEAS

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    Cited by:

    1. Loyola, Gino, 2008. "On bidding markets: the role of competition," UC3M Working papers. Economics we083318, Universidad Carlos III de Madrid. Departamento de Economía.
    2. John Asker, 2010. "A Study of the Internal Organization of a Bidding Cartel," American Economic Review, American Economic Association, vol. 100(3), pages 724-762, June.
    3. Ferrara, Gerardo & Li, Xin, 2017. "Central counterparty auction design," Bank of England working papers 669, Bank of England.
    4. John D. Sterman & Rebecca Henderson & Eric D. Beinhocker & Lee I. Newman, 2007. "Getting Big Too Fast: Strategic Dynamics with Increasing Returns and Bounded Rationality," Management Science, INFORMS, vol. 53(4), pages 683-696, April.
    5. Ken Hendricks & Robert Porter & Guofu Tan, 2008. "Bidding rings and the winner's curse," RAND Journal of Economics, RAND Corporation, vol. 39(4), pages 1018-1041, December.
    6. Paul Klemperer, 2007. "Bidding Markets," Journal of Competition Law and Economics, Oxford University Press, vol. 3(1), pages 1-47.
    7. Beshears, John, 2013. "The performance of corporate alliances: Evidence from oil and gas drilling in the Gulf of Mexico," Journal of Financial Economics, Elsevier, vol. 110(2), pages 324-346.
    8. Volker Nocke & Lucy White, 2003. "Do Vertical Mergers Facilitate Upstream Collusion? Second Version," PIER Working Paper Archive 05-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 08 Mar 2005.
    9. Robert Porter, 2005. "Detecting Collusion," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(2), pages 147-167, December.

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    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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