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Pre-play communication in procurement auctions: silence is not golden

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  • Lucie Ménager

    () (LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Universités)

Abstract

I study the effect of cheap talk between bidders on the outcome of a first-price procurement auction in which participation is costly. Although no side-payments or commitments are allowed, their exists a family of equilibria in which sellers use communication to collude on a subset of participants and/or to reveal information about their cost. I show that the buyer may benefit from cheap talk between sellers, and that the surplus increases with the amount of information revealed in equilibrium under fairly general conditions. This is because when communication is cheap, sellers cannot directly collude on higher prices. Rather, communication leads to a competition between fewer, but more aggressive bidders, which entails more allocative efficiency and a decrease in the total wasteful entry cost.

Suggested Citation

  • Lucie Ménager, 2015. "Pre-play communication in procurement auctions: silence is not golden," Working Papers hal-00856078, HAL.
  • Handle: RePEc:hal:wpaper:hal-00856078
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00856078v2
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    References listed on IDEAS

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    1. Aoyagi, Masaki, 2007. "Efficient collusion in repeated auctions with communication," Journal of Economic Theory, Elsevier, vol. 134(1), pages 61-92, May.
    2. Campbell, Colin M., 1998. "Coordination in Auctions with Entry," Journal of Economic Theory, Elsevier, vol. 82(2), pages 425-450, October.
    3. Rieck, Thomas, 2010. "Signaling in First-Price Auctions," Bonn Econ Discussion Papers 18/2010, University of Bonn, Bonn Graduate School of Economics (BGSE).
    4. Samuelson, William F., 1985. "Competitive bidding with entry costs," Economics Letters, Elsevier, vol. 17(1-2), pages 53-57.
    5. Werner Güth & Jeannette Brosig & Torsten Weiland, 2006. "Collusion mechanisms in procurement auctions: An experimental investigation," Papers on Strategic Interaction 2006-14, Max Planck Institute of Economics, Strategic Interaction Group.
    6. Matthews, Steven A. & Postlewaite, Andrew, 1989. "Pre-play communication in two-person sealed-bid double auctions," Journal of Economic Theory, Elsevier, vol. 48(1), pages 238-263, June.
    7. Antonio Miralles, 2010. "Self-enforced collusion through comparative cheap talk in simultaneous auctions with entry," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 42(3), pages 523-538, March.
    8. Chakraborty, Archishman & Harbaugh, Rick, 2003. "Cheap talk comparisons in multi-issue bargaining," Economics Letters, Elsevier, vol. 78(3), pages 357-363, March.
    9. Drew Fudenberg & Jean Tirole, 1983. "Sequential Bargaining with Incomplete Information," Review of Economic Studies, Oxford University Press, vol. 50(2), pages 221-247.
    10. Crawford, Vincent P & Sobel, Joel, 1982. "Strategic Information Transmission," Econometrica, Econometric Society, vol. 50(6), pages 1431-1451, November.
    11. Michihiro Kandori & Hitoshi Matsushima, 1998. "Private Observation, Communication and Collusion," Econometrica, Econometric Society, vol. 66(3), pages 627-652, May.
    12. Joel Sobel & Ichiro Takahashi, 1983. "A Multistage Model of Bargaining," Review of Economic Studies, Oxford University Press, vol. 50(3), pages 411-426.
    13. Ricardo Gonçalves, 2008. "A communication equilibrium in English auctions with discrete bidding," Working Papers de Economia (Economics Working Papers) 042008, Católica Porto Business School, Universidade Católica Portuguesa.
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    Keywords

    Pre-play communication; procurement auctions; collusion;

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