Collusion and signaling in auctions with interdependent values

The standard approach to collusion in auctions posits an uninformed, disinterested third party who, prior to the auction, designs and implements a collusive mechanism. In environments where collusion agreements are likely to be both proposed and executed by the involved parties, this approach may neglect information leakages from simply a proposal to collude. We consider a model of collusion where one informed bidder proposes to another, as in Eső and Schummer (2004). We allow for general interdependent values and affiliated signals. In contrast to third party modeling approaches, collusion is inefficient from both a social perspective (except for the case of pure common values) and from the perspective of the ring. Both bidders are better off than without colluding, but the surplus extracted from the seller is distributed asymmetrically between the bidders. The potential for information leakage from proposing is bad for low types, who reveal that they are weak competitors, but is advantageous for high types, because they are able to signal their strength. We identify a so-called “briber's curse,” whereby acceptance of a proposal causes the proposer to downgrade her expected value for the object. When there is additional competition in the form of bidders outside of the cartel, the briber's curse significantly harms cartel profits and raises seller revenues.