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Pre-play communication in procurement auctions: silence is not golden

Lucie Ménager

Working Papers from HAL

Abstract: I study the effect of cheap talk between bidders on the outcome of a first-price procurement auction in which participation is costly. Although no side-payments or commitments are allowed, their exists a family of equilibria in which sellers use communication to collude on a subset of participants and/or to reveal information about their cost. I show that the buyer may benefit from cheap talk between sellers, and that the surplus increases with the amount of information revealed in equilibrium under fairly general conditions. This is because when communication is cheap, sellers cannot directly collude on higher prices. Rather, communication leads to a competition between fewer, but more aggressive bidders, which entails more allocative efficiency and a decrease in the total wasteful entry cost.

Keywords: Pre-play communication; procurement auctions; collusion (search for similar items in EconPapers)
Date: 2015-01-16
New Economics Papers: this item is included in nep-com, nep-cta, nep-gth and nep-mic
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