The effect of collusion on efficiency in experimental auctions

Charles N. Noussair; Gyula Seres

doi:10.1016/j.geb.2019.11.002

The effect of collusion on efficiency in experimental auctions

Charles N. Noussair, Gyula Seres

Economics

Research output: Contribution to journal › Article › peer-review

6 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 language	English (US)
Pages (from-to)	267-287
Number of pages	21
Journal	Games and Economic Behavior
Volume	119
DOIs	https://doi.org/10.1016/j.geb.2019.11.002
State	Published - Jan 2020

Keywords

Auction
Bidding ring
Experiment
Information asymmetry

ASJC Scopus subject areas

Finance
Economics and Econometrics

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10.1016/j.geb.2019.11.002

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title = "The effect of collusion on efficiency in experimental auctions",

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.",

keywords = "Auction, Bidding ring, Experiment, Information asymmetry",

author = "Noussair, {Charles N.} and Gyula Seres",

note = "Funding Information: We thank the Center for Economic Research at Tilburg University for financial support. We are grateful to Jan Boone, Patrick Rey, Eric van Damme, Theo Offerman, Jan Potters, Nicholas Treich, Gary Charness, two anonymous referees, as well as participants at the Experimental Economics Meeting at Tilburg University, at the 2018 World Meeting of the ESA, and at the EARIE 2016 Conference, for their valuable comments. Publisher Copyright: {\textcopyright} 2019 Elsevier Inc.",

year = "2020",

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doi = "10.1016/j.geb.2019.11.002",

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T1 - The effect of collusion on efficiency in experimental auctions

AU - Noussair, Charles N.

AU - Seres, Gyula

N1 - Funding Information: We thank the Center for Economic Research at Tilburg University for financial support. We are grateful to Jan Boone, Patrick Rey, Eric van Damme, Theo Offerman, Jan Potters, Nicholas Treich, Gary Charness, two anonymous referees, as well as participants at the Experimental Economics Meeting at Tilburg University, at the 2018 World Meeting of the ESA, and at the EARIE 2016 Conference, for their valuable comments. Publisher Copyright: © 2019 Elsevier Inc.

PY - 2020/1

Y1 - 2020/1

N2 - 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.

AB - 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.

KW - Auction

KW - Bidding ring

KW - Experiment

KW - Information asymmetry

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The effect of collusion on efficiency in experimental auctions

Abstract

Keywords

ASJC Scopus subject areas

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