On the Failure of the Linkage Principle with Colluding Bidders
37 Pages Posted: 14 Jul 2017
Date Written: July 12, 2017
One of the fundamental results of auction theory is the Linkage Principle, which states that the seller’s expected revenue is enhanced by ex ante full public disclosure of information about the value of the good. Previous literature has established that the Principle fails in dynamic settings. We argue that information provision may also sustain collusion in single-unit auctions, thus harming the auctioneer. Using a model with private and common value components, we point out that disclosure curtails common value uncertainty, making communication between cartel members incentive compatible. We also show that collusion is feasible if and only if information provision reaches an interior threshold value.
Keywords: Auction, Bidding Ring, Cartel, Information Asymmetry
JEL Classification: C72, D44, D82, L41
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