Friday, November 15, 2013
Lucie Menager (LEM - Laboratoire d'Economie Moderne - Universite Paris II - Pantheon-Assas) discusses Communication in procurement: silence is not golden.
ABSTRACT: We study the effect of cheap talk between bidders on the outcome of a first-price procurement game with N sellers in which bidding is costly. Although no side-payements or commitments are allowed, we show that the game admits a unique family of symmetric equilibria in which sellers use communication to collude on a subset of participants and/or to reveal information about their valuation. Contrary to the conventional wisdom, the buyer's expected revenue and the surplus need not decrease with collusion, and the ex-ante surplus increases with the amount of information revealed in equilibrium. This is because when communication is cheap, bidders 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.