Collusion and Information Revelation in Auctions

39 Pages Posted: 4 Apr 2017

See all articles by Aniol Llorente-Saguer

Aniol Llorente-Saguer

Queen Mary University of London

Ro'i Zultan

Ben-Gurion University of the Negev

Date Written: March 2017

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 first-price 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.

Keywords: auctions, Collusion, Experiment

JEL Classification: C72, C91, D44

Suggested Citation

Llorente-Saguer, Aniol and Zultan, Ro'i, Collusion and Information Revelation in Auctions (March 2017). CEPR Discussion Paper No. DP11944. Available at SSRN: https://ssrn.com/abstract=2945359

Aniol Llorente-Saguer (Contact Author)

Queen Mary University of London ( email )

Lincoln's Inn Fields
Mile End Rd.
London, E1 4NS
United Kingdom

HOME PAGE: http://https://sites.google.com/site/aniollls/

Ro'i Zultan

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

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