The Effect of Collusion on Efficiency in Experimental Auctions

Charles Noussair and Gyula Seres

No 2017-09, Experimental Economics Center Working Paper Series from Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University

Abstract: This paper examines the effect of collusion on allocative efficiency in a second-price sealed-bid auction, in which bidders\' valuations have 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 join a cartel, collusion has a negative impact on efficiency, and a reduction in common value signal variance increases efficiency under a cartel, as well as in a competitive setting.

Keywords: Auction; Bidding ring; Information asymmetry; Experiment (search for similar items in EconPapers)
JEL-codes: C92 D44 D82 L41 (search for similar items in EconPapers)
Pages: 50
Date: 2017-02
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http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2017-09.pdf (application/pdf)

Related works:
Journal Article: The effect of collusion on efficiency in experimental auctions (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:exc:wpaper:2017-09

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