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Bidding Rings and the Winner's Curse: The Case of Federal Offshore Oil and Gas Lease Auctions

  • Ken Hendricks
  • Robert Porter
  • Guofu Tan

This paper extends the theory of legal cartels to affiliated private value and common value environments, and applies the theory to explain joint bidding patterns in U.S. federal government offshore oil and gas lease auctions. We show that efficient collusion is always possible in private value environments, but may not be in common value environments. In the latter case, fear of the winner's curse can cause bidders not to bid, which leads to inefficient trade. Buyers with high signals may be better off if no one colludes. The bid data is consistent with oil and gas leases being common value assets, and with the prediction that the winner's curse can prevent rings from forming on marginal tracts.

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File URL: http://www.nber.org/papers/w9836.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9836.

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Date of creation: Jul 2003
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Publication status: published as Hendricks, Ken, Robert Porter, and Guofu Tan. “Bidding Rings and the Winner’s Curse." RAND Journal of Economics 39, 4 (Winter 2008): 1018-1041.
Handle: RePEc:nbr:nberwo:9836
Note: IO
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  1. Hendricks, Kenneth & Porter, Robert H, 1992. "Joint Bidding in Federal OCS Auctions," American Economic Review, American Economic Association, vol. 82(2), pages 506-11, May.
  2. Matthew O Jackson & Hugo F Sonnenschein, 2003. "The Linking of Collective Decisions and Efficiency," NajEcon Working Paper Reviews 666156000000000057, www.najecon.org.
  3. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-65, Autumn.
  4. Rockwood, Alan, 1983. "The Impact of Joint Ventures on the Market for OCS Oil and Gas Leases," Journal of Industrial Economics, Wiley Blackwell, vol. 31(4), pages 453-68, June.
  5. Kenneth Hendricks & Joris Pinkse & Robert H. Porter, 2003. "Empirical Implications of Equilibrium Bidding in First--Price, Symmetric, Common Value Auctions," Review of Economic Studies, Wiley Blackwell, vol. 70(1), pages 115-145, January.
  6. Baldwin, Laura H & Marshall, Robert C & Richard, Jean-Francois, 1997. "Bidder Collusion at Forest Service Timber Sales," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 657-99, August.
  7. McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
  8. Porter, Robert H, 1995. "The Role of Information in U.S. Offshore Oil and Gas Lease Auctions," Econometrica, Econometric Society, vol. 63(1), pages 1-27, January.
  9. Pesendorfer, Martin, 2000. "A Study of Collusion in First-Price Auctions," Review of Economic Studies, Wiley Blackwell, vol. 67(3), pages 381-411, July.
  10. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  11. Cramton Peter C. & Palfrey Thomas R., 1995. "Ratifiable Mechanisms: Learning from Disagreement," Games and Economic Behavior, Elsevier, vol. 10(2), pages 255-283, August.
  12. Cramton, Peter C & Palfrey, Thomas R, 1990. "Cartel Enforcement with Uncertainty about Costs," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 17-47, February.
  13. Klemperer, Paul, 1998. "Auctions with almost common values: The 'Wallet Game' and its applications," European Economic Review, Elsevier, vol. 42(3-5), pages 757-769, May.
  14. Robert H. Porter & J. Douglas Zona, 1999. "Ohio School Milk Markets: An Analysis of Bidding," RAND Journal of Economics, The RAND Corporation, vol. 30(2), pages 263-288, Summer.
  15. Wilson, Robert, 1977. "A Bidding Model of Perfect Competition," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 511-18, October.
  16. Graham, Daniel A & Marshall, Robert C, 1987. "Collusive Bidder Behavior at Single-Object Second-Price and English Auctions," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1217-39, December.
  17. Mailath, George J. & Zemsky, Peter, 1991. "Collusion in second price auctions with heterogeneous bidders," Games and Economic Behavior, Elsevier, vol. 3(4), pages 467-486, November.
  18. Laffont, Jean-Jacques & Vuong, Quang, 1996. "Structural Analysis of Auction Data," American Economic Review, American Economic Association, vol. 86(2), pages 414-20, May.
  19. Robert H. Porter & J. Douglas Zona, 1992. "Detection of Bid Rigging in Procurement Auctions," NBER Working Papers 4013, National Bureau of Economic Research, Inc.
  20. Gilley, Otis W & Karels, Gordon V & Lyon, Randolph M, 1985. "Joint Ventures and Offshore Oil Lease Sales," Economic Inquiry, Western Economic Association International, vol. 23(2), pages 321-39, April.
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