Joint Bidding, Information Pooling, and the Performance of Petroleum Lease Auctions

Larry M. DeBrock and James L. Smith

Bell Journal of Economics, 1983, vol. 14, issue 2, pages 395-404

Abstract: This article uses a game-theoretic bidding model to examine the effect of joint bidding in offshore petroleum lease auctions. We show that joint bidding increases the total social value of the lease offering and, in most cases, does not significantly decrease the percentage of social value captured by the government. These results follow from the fact that pooling of information concerning a priori unknown tract values allows for more accurate estimates. The anticompetitive effect of a reduced number of bidders tends to be offset by the well-known fact that better informed participants bid more aggressively. Our findings are striking in that the model abstracts entirely from the effects of increased entry and greater risk diversification, the two common arguments in support of joint bidding.

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