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Favouritism and cartel disruption in first-price auctions

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  • Ricardo Gonçalves

    () (Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro)

Abstract

The seller in an auction will generally not be happy to know that a cartel of bidders will take part in that auction. Cartels generate their profits by inducing a final price which is lower (higher in the case of procurement contracts' auctions) than in a competitive auction. This paper proposes a solution to the problem. By allowing the seller to cheat on the auction rules, and to allocate the good to a given bidder with a predetermined probability (favouritism), we show that when no cartel is active, the auction leads to a lower price than that obtained in a purely competitive auction. However, if a cartel is operative, favouritism generates incentives for the favoured bidder to defect the cartel. This single defection is sufficient to disrupt the cartel. In equilibrium, the seller may choose this probability of cheating so as to obtain the highest possible final auction price, which we show to be a second-best outcome. In other words, this proposed solution to the cartel's existence does not lead to a final auction price as high as that obtained in a competitive auction.

Suggested Citation

  • Ricardo Gonçalves, 2004. "Favouritism and cartel disruption in first-price auctions," Working Papers de Economia (Economics Working Papers) 15, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
  • Handle: RePEc:ave:wpaper:152004
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    References listed on IDEAS

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    1. McAfee, R Preston & McMillan, John, 1992. "Bidding Rings," American Economic Review, American Economic Association, vol. 82(3), pages 579-599, June.
      • McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
    2. Feinstein, Jonathan S & Block, Michael K & Nold, Frederick C, 1985. "Asymmetric Information and Collusive Behavior in Auction Markets," American Economic Review, American Economic Association, vol. 75(3), pages 441-460, June.
    3. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-286, July.
    4. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
    5. Riley, John G & Samuelson, William F, 1981. "Optimal Auctions," American Economic Review, American Economic Association, vol. 71(3), pages 381-392, June.
    6. Skrzypacz, A. & Hopenhayn, H., 1999. "Bidding Rings in Repeated Auctions," RCER Working Papers 463, University of Rochester - Center for Economic Research (RCER).
    7. Klemperer, Paul, 1999. " Auction Theory: A Guide to the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 13(3), pages 227-86, July.
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    More about this item

    Keywords

    First-price auctions; collusion; cartels;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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