The effect of collusion on efficiency in experimental auctions

Charles N. Noussair, Gyula Seres

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)267-287
Number of pages21
JournalGames and Economic Behavior
Volume119
DOIs
StatePublished - Jan 2020

Keywords

  • Auction
  • Bidding ring
  • Experiment
  • Information asymmetry

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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