Tacit Collusion in Auctions and Conditions for its Facilitation and Prevention: Equilibrium Selection in Laboratory Experimental Markets

Posted by D. Daniel Sokol

Jin Li, Northwestern University - Department of Management & Strategy and Charles R. Plott, California Institute of Technology - Division of the Humanities and Social Sciences explain Tacit Collusion in Auctions and Conditions for its Facilitation and Prevention: Equilibrium Selection in Laboratory Experimental Markets.

ABSTRACT: The paper studies bidder behavior in simultaneous, continuous, ascending price auctions. We design and implement a “collusion incubator” environment based on a type of public, symmetrically “folded” and “item-aligned” preferences. Tacit collusion develops quickly and reliably within the environment. Once tacit collusion developed, it proved remarkably robust to institutional changes that weakened it as an equilibrium of a game-theoretic model. The only successful remedy was a non-public change in the preference of participants that destroyed the symmetrically, “folded” and “item aligned” patterns of preferences, creating head-to-head competition between two agents reminiscent of the concept of a “maverick.”