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Deciding Between Competition and Collusion

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Patrick Bajari
Lixin Ye

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Abstract

May 2001

In many studies in empirical industrial organization, the economist needs to decide between several non-nested models of industry equilibrium. In this paper, we develop a new approach to the model selection problem that can be used when the economist must decide between models with bid-rigging and models without bid-rigging. We elicit from industry experts a prior distribution over markups across auctions. This induces a prior distribution over structural cost parameters. We then use Bayes Theorem to compute posterior probabilities for several non-nested models of industry equilibrium. In many settings, we believe that it is useful to formally incorporate the a prior beliefs of industry experts into estimation, especially in small samples where asymptotic approximations may be unreliable. We apply our methodology to a data set of bidding by construction firms in the Midwest. The techniques we propose are not computationally demanding, use flexible functional forms and can be programmed using most standard statistical packages.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 01008.

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Date of creation: May 2001
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Handle: RePEc:wop:stanec:01008

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  1. De Silva Dakshina & Pagel Beatrice & Peeters Ronald, 2008. "Sequential versus Simultaneous Auctioning of Procurement Contracts with Common Value and Private Value Components," Research Memoranda 005, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  2. Hiroshi Ohashi, 2008. "Effects of Transparency in Procurement Practices on Government Expenditure: A Case Study of Municipal Public Works," CIRJE F-Series CIRJE-F-548, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  3. Elena Krasnokutskaya, 2004. "Identification and Estimation in Highway Procurement Auctions under Unobserved Auction Heterogeneity," PIER Working Paper Archive 05-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  4. Patrick Bajari & Garrett Summers, . "Detecting Collusion in Procurement Auctions: A Selective Survey of Recent Research," Working Papers 01014, Stanford University, Department of Economics. [Downloadable!]
  5. Rieko Ishii, 2007. "Collusion in Repeated Procurement Auction: a Study of Paving Market in Japan," Discussion Papers in Economics and Business 07-16, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP). [Downloadable!]
  6. Dakshina G. De Silva & Anuruddha Kankanamge & Georgia Kosmopoulou, 2005. "The Impact Of Change In Auction Format On Bidding Behavior," Microeconomics 0512009, EconWPA. [Downloadable!]
  7. Harmsen-van Hout Marjolein J.W. & Dellaert Benedict G.C. & Herings P. Jean-Jacques, 2008. "Behavorial Effects in Individual Decisions of Network Formation," Research Memoranda 019, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  8. Susan Athey & Jonathan Levin & Enrique Seira, 2004. "Comparing Open and Sealed Bid Auctions: Theory and Evidence from Timber Auctions," Levine's Bibliography 122247000000000524, UCLA Department of Economics. [Downloadable!]
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  9. Saphores, Jean-Daniel & Vincent, Jeffrey R. & Marochko, Valy & Abrudan, Ioan & Bouriaud, Laura & Zinnes, Clifford, 2006. "Detecting collusion in timber auctions : an application to Romania," Policy Research Working Paper Series 4105, The World Bank. [Downloadable!]
  10. Dakshina De Silva & Timothy Dunne & Anuruddha Kankanamge & Georgia Kosmopoulou, 2005. "The Impact of Public Information on Bidding in Highway Procurement Auctions," Microeconomics 0511011, EconWPA. [Downloadable!]
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  11. Pot Erik & Peeters Ronald & Peters Hans & Vermeulen Dries, 2008. "Noncooperative Collusion and Price Wars with Individual Demand Fluctuations," Research Memoranda 017, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  12. Susan Athey, 2005. "Comparing Open and Sealed Bid Auctions: Theory and Evidence from Timber Auctions," Theory workshop papers 658612000000000098, UCLA Department of Economics. [Downloadable!]
  13. Xu, Pai & Shneyerov, Artyom & Marmer, Vadim, 2007. "What Model for Entry in First-Price Auctions? A Nonparametric Approach," Micro Theory Working Papers marmer-07-11-22-02-26-44, Microeconomics.ca Website, revised 22 Nov 2007. [Downloadable!]
  14. De Silva, Dakshina & Kosmopoulou, Georgia & Lamarche, Carlos, 2007. "The Effect of Information on the Bidding and Survival of Entrants in Procurement Auctions," MPRA Paper 5236, University Library of Munich, Germany. [Downloadable!]
  15. Patrick Bajari & Stephanie Houghton & Steve Tadelis, 2006. "Bidding for Incomplete Contracts: An Empirical Analysis," NBER Working Papers 12051, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Hiller Benjamin & Vredeveld Tjark, 2008. "Probabilistic analysis of Online Bin Coloring algorithms via Stochastic Comparison," Research Memoranda 006, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  17. Patrick Bajari & Stephanie Houghton & Steven Tadelis, 2004. "Bidding for Incompete Contracts," Working Papers 2004.141, Fondazione Eni Enrico Mattei. [Downloadable!]
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