Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, August 24, 2010

Strategic Collusion in Auctions with Externalities

Posted by D. Daniel Sokol

Omer Biran (CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - CNRS : UMR7534 - Université Paris Dauphine - Paris IX) addresses Strategic Collusion in Auctions with Externalities.

ABSTRACT: We study a first price auction preceded by a negotiation stage, during which bidders may form a bidding ring. We prove that in the absence of external effects the all-inclusive ring forms in equilibrium, allowing ring members to gain the auctioned object for a minimal price. However, identity dependent externalities may lead to the formation of small rings, as often observed in practice. Potential ring members may condition their participation on high transfer payments, as a compensation for their expected (negative) externalities if the ring forms. The others may therefore profitably exclude such "demanding" bidders, although risking tougher competition in the auction. We also analyze ring inefficiency in the presence of externalities, showing that a ring may prefer sending an inefficient member to the auction, if the efficient member exerts threatening externalities on bidders outside the ring, which in turn leads to a higher winning price.

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