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Collusion and information revelation in auctions

Aniol Llorente-Saguer () and Ro'i Zultan ()

European Economic Review, 2017, vol. 95, issue C, 84-102

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 behaviour. 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 behaviour, 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 behaviour 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 (search for similar items in EconPapers)
JEL-codes: C72 C91 D44 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4) Track citations by RSS feed

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:95:y:2017:i:c:p:84-102

DOI: 10.1016/j.euroecorev.2017.03.012

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European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

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