Efficient collusion in repeated auctions with communication

This paper studies collusion in repeated auctions when bidders communicate prior to each stage auction. For independent and correlated private signals and general interdependent values, the paper identifies conditions under which an equilibrium collusion scheme is fully efficient in the sense that the bidders’ payoff is close to what they get when the object is allocated to the highest valuation bidder at the reserve price in every period.     

Tacit collusion in repeated auctions

This paper considers the question of tacit collusion in repeated auctions with independent private values and with limited public monitoring. McAfee and McMillan show that the extent of collusion is tied to the availability of transfers. Monetary transfers allow cartels to extract full surplus. A folk theorem proved by Fudenberg et al. (Econometrica 62 (1994) 997-1039) shows that transfers of future payoffs are almost as good if players are patient and communicate before auctions. We ask how the scope of collusion is affected if players dispense with explicit communication and their monitoring is limited. Collusion better than bid rotation is still feasible, but full surplus cannot be extracted. This constraint becomes less severe with more players and large cartels can become asymptotically efficient even with very limited monitoring.     

Efficient collusion in optimal auctions

We study collusion in an IPV auction with binary type spaces. Collusion is organized by a third party that can manipulate participation decisions. We characterize the optimal response of the seller to different threats of collusion among the bidders. We show that, contrary to the prevailing view that asymmetric information imposes transaction costs in side contracting, collusion in the optimal auction is efficient when the third party can implement monetary transfers as well as when it can implement monetary transfers and reallocations of the good. The threat of non-participation in the auction by a subset of bidders is crucial in constraining the seller's profit.     

Reputational cheap talk with misunderstanding

We consider a cheap talk game with a sender who has a reputational concern for an ability to predict a state of the world correctly, and where receivers may misunderstand the message sent. When communication between the sender and each receiver is private, we identify an equilibrium in which the sender only discloses the least noisy information. Hence, what determines the amount of information revealed is not the absolute noise level of communication, but the extent to which the noise level may vary. The resulting threshold in transmission noise for which information is revealed may differ across receivers, but is unrelated to the quality of the information channel. When information transmission has to be public, a race to the bottom results: the cut-off level for noise of transmitted information now drops to the lowest cut-off level for any receiver in the audience.     

Multidimensional cheap talk with sequential messages

This paper studies a two-dimensional cheap talk game with two senders and one receiver. The senders possess the same information and sequentially send messages about that information. In one-dimensional sequential message cheap talk games where the state space is unbounded, the information is fully transmitted under the self-serving belief, as suggested by Krishna and Morgan (2001b). However, this result depends crucially on the structure of the one-dimensional model. It generally does not hold in two-dimensional models. We consider the extended self-serving belief, which implies full information transmission even if the self-serving belief cannot work. Then, we show that the necessary and sufficient condition for the existence of the fully revealing equilibrium is that the senders have opposing-biased preferences.     

Bid rotation and collusion in repeated auctions

This paper studies bidder collusion with communication in repeated auctions when no side transfer is possible. It presents a simple dynamic bid rotation scheme which coordinates bids based on communication history and enables intertemporal transfer of bidders’ payoffs. The paper derives a sufficient condition for such a dynamic scheme to be an equilibrium and characterizes the equilibrium payoffs in a general environment with affiliated signals and private or interdependent values. With IPV, it is shown that this dynamic scheme yields a strictly higher payoff to the bidders than any static collusion scheme which coordinates bids based only on the current reported signals.     

Bundle and separate sales in auctions with entry

A seller sells dissimilar objects while taking the auction rule as given. Should the seller sell the objects separately or as a bundle? Generally, when the number of bidders is small bundling helps to stimulate the competition and raise revenue. In this paper, we show that if entry is costly enough the process of endogenous participation generates sufficient competition to make bundling unnecessary in auctions. Thus whether a bundle auction generates a higher or a lower revenue ultimately depends first on the level of the entry costs and then, possibly, on the number of potential bidders.     

Equilibrium selection in experimental cheap talk games

In the past, many refinements have been proposed to select equilibria in cheap talk games. Usually, these refinements were motivated by a discussion of how rational agents would reason in some particular cheap talk games. In this paper, we propose a new refinement and stability measure that is intended to predict actual behavior in a wide range of cheap talk games. According to our Average Credible Deviation Criterion (ACDC), the stability of an equilibrium is determined by the frequency and size of credible deviations. ACDC organizes the results from several cheap talk experiments in which behavior converges to equilibrium, even in cases where other criteria do not make a prediction.     

Price collusion with free entry: the parasitic competition

The market equilibrium that is generated in the presence of both price collusion and free entry is analyzed taking under consideration the case of a homogeneous product and the case of differentiated products. The outcomes of this market regime are compared with those of other regimes, including competition (or monopolistic competition), monopoly, fixed price with collusive entry limitation. Some welfare implications of the market regime of price collusion with free entry are examined, with respect to the maximum social welfare allocation and the allocations of other market regimes, so to highlight the inefficiency of price collusion with free entry. The number of producers results to be the maximum number of firms that can produce without incurring into losses. Therefore, social distress is caused by a displacement from the price collusion equilibrium with free entry. Its defence can thus be considered in reference to the desirability of social goals that are in contradiction with economic efficiency.     

An experimental investigation of entry cost effects in sealed-bid dollar auctions

We experimentally study the effect of entry costs on bidding and entry behavior in common value auctions. We find, with entry costs, players bid lower in first price and higher in second price auctions, compared to no entry fee auctions.     

Endogenous entry and self-selection in private value auctions: An experimental study

This paper presents the results of an experimental study of endogenous entry in first-price independent private value auctions. N potential bidders simultaneously decide whether to participate in an auction or receive a known outside option. In the second stage, entrants submit bids after learning their own private values and the number of entrants. An equilibrium model of heterogeneous risk averse bidders implies a self-selection effect, where bidding in the auction is lower with endogenous entry because only less risk averse bidders enter. This effect is confirmed by the experiment. We also observe excessive entry relative to the theoretical model.     

Disclosure policies in all-pay auctions with bid caps and stochastic entry: The impact of risk aversion

We investigate how risk aversion affects the organizer's disclosing the actual number of bidders in an all-pay auction with an exogenous bid cap and stochastic entry. With an exogenous probability of participation, the organizer prefers fully concealing the number of participating bidders when bidders are risk neutral. However, this result does not hold with risk aversion. Specifically, whether the organizer prefers fully concealing or fully revealing information depends on the number of potential bidders, the probability of participation, and the size of bid caps. A special case of endogenous entry shows that the organizer's preference is similar to the risk-neutral case.     

Whatever you say, your reputation precedes you: Observation and cheap talk in the trust game

Behavior in trust games has been linked to general notions of trust and trustworthiness, important components of social capital. In the equilibrium of a trust game, the investor does not invest, foreseeing that the allocator would keep all of the returns. We use a human-subjects experiment to test the effects of changes to the game designed to increase cooperation and efficiency. We add a pre-play stage in which the investor receives a cheap-talk message from the allocator, observes the allocator's previous decision, or both. None of these changes alter the game's theoretical predictions. We find that allowing observation results in substantially higher cooperation and efficiency, but cheap talk has little effect.     

Multi-unit demand auctions with synergies: behavior in sealed-bid versus ascending-bid uniform-price auctions

We construct a relatively simple model of bidding with synergies and solve it for both open outcry and sealed-bid uniform-price auctions. The essential behavioral forces involved in these auctions are: (1) A demand reduction force resulting from the monopsony power that bidders with multiple-unit demands have when synergies are relatively inconsequential, and (2) Bidding above stand-alone values in order to capture significant complementarities between units. The latter creates a potential “exposure problem,” as bidders may win only parts of a package and earn negative profits. Bidding outcomes are closer to equilibrium in clock compared to sealed-bid auctions. However, there are substantial and systematic deviations from equilibrium, with patterns of out-of-equilibrium play differing systematically between the two auction formats. These patterns of out-of-equilibrium play are analyzed, along with their effects on revenue and efficiency.     

Multi-unit demand auctions with synergies: behavior in sealed-bid versus ascending-bid uniform-price auctions

We construct a relatively simple model of bidding with synergies and solve it for both open outcry and sealed-bid uniform-price auctions. The essential behavioral forces involved in these auctions are: (1) A demand reduction force resulting from the monopsony power that bidders with multiple-unit demands have when synergies are relatively inconsequential, and (2) Bidding above stand-alone values in order to capture significant complementarities between units. The latter creates a potential “exposure problem,” as bidders may win only parts of a package and earn negative profits. Bidding outcomes are closer to equilibrium in clock compared to sealed-bid auctions. However, there are substantial and systematic deviations from equilibrium, with patterns of out-of-equilibrium play differing systematically between the two auction formats. These patterns of out-of-equilibrium play are analyzed, along with their effects on revenue and efficiency.     

Uniqueness in symmetric first-price auctions with affiliation

The first-price auction has a unique monotone pure strategy equilibrium when there are n symmetric risk-averse bidders having affiliated types and interdependent values.