Auction Mechanisms and Bidder Collusion: Bribes, Signals and Selection

Abstract

The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. In equilibrium, collusive negotiations are either successful or are avoided altogether, hence such analysis neglects the effects of failed collusion attempts. In such contingencies, information revealed in the negotiation process is likely to affect the bidding behavior in firstprice (but not second-price) auctions. We test experimentally a setup in which collusion is possible, but negotiations often break down and information is revealed in an asymmetric way. The existing theoretical analysis of our setup predicts that the first-price mechanism deters collusion. In contrast, we find the same level of collusion in first-price and second-price auctions. Furthermore, failed collusion attempts distort the bidding behavior in the ensuing auction, leading to loss of efficiency and eliminating the revenue dominance typically observed in first-price auctions.

Collusion through communication in auctions

“…This profile of actions is no longer an equilibrium if the prevailing norm was to split 39 Notice that there could be a multiplicity of equilibria. In particular, in second-price auctions, winning bidders could submit arbitrary positive bids and we indeed see a substantial variance of high bids in our second-price auctions.…”