Deterring collusion with a reserve price: an auction experiment
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Deterring collusion with a reserve price: an auction experiment Pacharasut Sujarittanonta1 · Ajalavat Viriyavipart2 Received: 24 September 2019 / Revised: 9 July 2020 / Accepted: 22 July 2020 © Economic Science Association 2020
Abstract We experimentally compare collusive behaviors in first-price sealed-bid auctions without and with a reserve price. Before the auction begins, a bidder may offer a bribe to the other bidder, in exchange for a commitment not to participate in the auction. We find that the average offer and the rate of successful bribes are significantly lower in the treatment with a reserve price. These results are largely due to responding bidders who demand a greater share of the benefit from collusion. Although imposing a reserve price reduces efficiency, its optimality and bribe deterrence shift the surplus from the bidders to the seller. Keywords Collusion · Reserve price · Auctions · Bribes · Experiment JEL Classification D44 · C91 · C72
1 Introduction Collusion among bidders is one of the main concerns when designing an auction, because collusion lowers auction revenue. Even worse, due to its covert nature, collusion is difficult to prevent (Bajari and Summers 2002; Porter 2005). Since the ability to detect it may discourage collusion, a handful of papers propose empirical methods to do so. These methods involve comparing the actual bid distribution to that expected when bidders behave competitively (Porter and Zona 1993; Baldwin et al. 1997; Bajari and Ye 2003). However, constructing such a scenario is complicated, because it requires an estimate of the bidders’ private information. Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1068 3-020-09671-x) contains supplementary material, which is available to authorized users. * Ajalavat Viriyavipart [email protected] 1
Faculty of Economics, Chulalongkorn University, Bangkok, Thailand
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Department of Economics, American University of Sharjah, Sharjah, United Arab Emirates
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Furthermore, the matter is particularly challenging since there are multiple collusive mechanisms, including bid rotation (Aoyagi 2003; Phillips et al. 2003; Skrzypacz and Hopenhayn 2004; Rachmilevitch 2013b), knockout auctions (Graham and Marshall 1987; Kwoka Jr. 1997; Hendricks et al. 2008; Noussair and Seres 2020), and bribery (Eső and Schummer 2004; Rachmilevitch 2013a, 2015; Troyan 2017). Instead of relying only on a post-auction investigation, an auction designer should at least preemptively employ measures to mitigate collusion, such as choosing first pricing as opposed to second pricing (Robinson 1985; Marshall and Marx 2007; Lopomo et al. 2011) and eliminating bidders’ opportunities to send signals (Cramton and Schwartz 2000). Another widely known tactic is to set a reserve price to reduce the potential gain from collusion.1 Most, if not all, auctions in the real world have either open or secret reserve prices. Klemperer (2002) discusses why s
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