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The Effect of Collusion on Efficiency in Experimental Auctions

Author

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  • Charles N. Noussair
  • Gyula Seres

Abstract

This paper examines the effect of collusion on allocative efficiency in a second-price sealed-bid auction, in which bidders\' valuations have private and common value components. We present a theoretical model which shows that explicit collusion improves average efficiency. Furthermore, a reduction in common value signal variance increases the efficiency of allocations when a cartel is present. We test for the presence of these patterns in a laboratory experiment. Subjects can choose whether to compete or to form a cartel. Colluding bidders can communicate and make side payments using a knockout auction. Our results show that a large majority of bidders join a cartel, collusion has a negative impact on efficiency, and a reduction in common value signal variance increases efficiency under a cartel, as well as in a competitive setting.

Suggested Citation

  • Charles N. Noussair & Gyula Seres, 2017. "The Effect of Collusion on Efficiency in Experimental Auctions," Experimental Economics Center Working Paper Series 2017-09, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    • Handle: RePEc:exc:wpaper:2017-09
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    File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2017-09.pdf
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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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