TACIT COLLUSION IN AUCTIONS AND CONDITIONS FOR ITS FACILITATION AND PREVENTION: EQUILIBRIUM SELECTION IN LABORATORY EXPERIMENTAL MARKETS

JIN LI, CHARLES R. PLOTT
2009 Economic Inquiry  
The paper studies bidder behavior in simultaneous, continuous, ascending price auctions. We design and implement special conditions, a type of "collusion incubator" environment, within which tacit collusion develops quickly, naturally and reliably. The collusion incubator environment is designed as a methodological tool that permits observation of phenomenon that has difficulty surviving in other environments, study models of its development, and then study institutional and environmental
more » ... es that would cause it to evolve into competitive behavior. The special, collusion incubator environments are based on a type of public, symmetrically "folded" preferences together with what we call "item-aligned" preferences. The research design called for exploratory, experimental probes of possible institutional or procedural "remedies" that might destroy the tacit collusion and promote competitive behavior should tacit collusion take place. The results are as follow. (1) The collusion incubator environmental conditions do foster tacit collusion. (2) The tacit collusion corresponds to the unique buyer Pareto Equilibrium of a game theoretic model of the auction process. (3) Once tacit collusion developed, it proved remarkably robust to institutional changes that weakened it as an equilibrium of the game theoretic model. ( 4) The only remedy that was clearly successful 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".
doi:10.1111/j.1465-7295.2008.00152.x fatcat:hrbyqsmyeraepd43ufsnszsyra