The effect of collusion on efficiency in experimental auctions

This paper examines the effect of collusion on allocative efficiency in a second-price sealed-bid auction, in which bidders' valuations have both private and common value components. We present a theoretical model which shows that explicit collusion improves average efficiency. Furthermore, a r...

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Bibliographic Details
Published in:Games and economic behavior 2020-01, Vol.119, p.267-287
Main Authors: Noussair, Charles N., Seres, Gyula
Format: Article
Language:English
Subjects:
Auction
Bidding ring
Experiment
Information asymmetry
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Summary:This paper examines the effect of collusion on allocative efficiency in a second-price sealed-bid auction, in which bidders' valuations have both 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 joins a cartel and collusion has a negative impact on efficiency.
ISSN:0899-8256
1090-2473
DOI:10.1016/j.geb.2019.11.002