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A simple model of coalitional bidding

Listed author(s):
  • Rajiv Vohra


    (Department of Economics, Brown University, Providence, Rhode Island 02912, USA)

  • In-Koo Cho


    (Department of Economics, University of Illinois, Champaign, Illinois 61820, USA)

  • Kevin Jewell


    (Cornerstone Research, Boston, Massachusetts 02115, USA)

We analyze a model of coalitional bidding in which coalitions form endogenously and compete with each other. Since the nature of this competition influences the way in which agents organize themselves into coalitions, our main aim is to characterize the equilibrium coalition structure and the resulting bids. We do so in a simple model in which the seller may have good reason to allow joint bidding. In particular, we study a model in which the agents are budget constrained, and are allowed to form coalitions to pool their finances before engaging in the first price auction. We show that if the budget constraint is very severe, the equilibrium coalition structure consists of two coalitions, one slightly larger than the other; interestingly, it is not the grand coalition. This equilibrium coalition structure is one which yields (approximately) the maximum expected revenue. Thus the seller can induce the optimal (revenue maximizing) degree of cooperation among budget constrained buyers simply by permitting them to collude.

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Article provided by Springer & Society for the Advancement of Economic Theory (SAET) in its journal Economic Theory.

Volume (Year): 19 (2002)
Issue (Month): 3 ()
Pages: 435-457

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Handle: RePEc:spr:joecth:v:19:y:2002:i:3:p:435-457
Note: Received: June 25, 1999; revised version: November 13, 2000
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