Collusion and information revelation in auctions

Abstract

The theoretical literature on collusion in auctions suggests that the first-price mechanism can deter the formation of bidding rings. However, such analyses neglect to consider the effects of failed collusion attempts, wherein information revealed in the negotiation process may affect bidding behavior. We experimentally test a setup in which theory predicts no collusion and no information revelation in first-price auctions. The results reveal a hitherto overlooked failing of the firstprice mechanism: failed collusion attempts distort bidding behavior, resulting in a loss of seller revenue and efficiency. Moreover, the first-price mechanism does not result in less collusion than the second-price mechanism. We conclude that, while the features of the first-price mechanism may have the potential to deter bidder collusion, the role of beliefs in guiding bidding behavior make it highly susceptible to distortions arising from the informational properties of collusive negotiation. Auction designers should take this phenomenon into account when choosing the auction mechanism.

Cartel Stability in Experimental Auctions

“…We conclude that Robinson's (1985) intuition works in simple settings, which serves as a starting point in gaining insight as to why it fails to work in the more complex settings studied by Hu et al (2011), Llorente-Saguer et al (2017, and Agranov and Yariv (2018). Two potential reasons why our results are differ from theirs come to mind.…”

“…41 The theoretical result of Robinson (1985) that cartels are more stable in the English auction than in the first-price sealed auction would suggest that auction designers should follow the advice of the OECD (2006) to use the first-price sealed-bid auction rather than the English auction in environments where collusion is a significant threat (p.36). However, Hu et al (2011), Llorente-Saguer et al (2017, and Agranov and Yariv (2018) fail to provide empirical support to the OECD's advice in that they do not find the auctions to differ in terms of collusion. Indeed, why does Robinson's (1985) insight not hold true experimentally?…”

“…In both studies, we find support for the hypothesis that more cartels are stable in the English auction than in the first-price sealed-bid auction. 8 We conclude that the intuition of Robinson (1985) applies in simple settings, which serves as a starting point in gaining further insight as to why it fails to work in the more complex settings such as those studied by Hu et al (2011), Llorente-Saguer et al (2017), and Agranov and Yariv (2018).…”

“…It is not clear why the experimental literature to date has offered little support for the proposition that the English auction is more conductive to collusion than the first-price sealed-bid auction. Several factors might explain this discrepancy: Cartels are stable by construction in Hu et al (2011) and Llorente-Saguer et al (2017); Llorente-Saguer et al (2017) and Agranov and Yariv (2018) use a strategically equivalent sealed-bid variant of the English auction; 7 In Agranov and Yariv (2018), communication between bidders is non-binding and side payments are not enforceable. In this paper, we aim to improve our understanding of the conditions under which the English auction is more prone to collusion than the first-price sealed-bid auction.…”

Auctions With Leaks About Early Bids: Analysis and Experimental Behavior

“…44 For example, possible collusion is taken in the theoretical literature as a justification for using the first‐price rule (Fehl and Güth 1987; Güth and Peleg 1996; Marshall and Marx 2007; Robinson 1985), though the experimental evidence is mixed (e.g., Hinloopen and Onderstal 2014; Hu, Offerman, and Onderstal 2011; Llorente‐Saguer and Zultan 2017) for experimental evidence. …”