COLLUSION IN THE PRESENCE OF EXTERNALITIES

Authors


  • *This is a revised version of the first chapter of my dissertation from Columbia University. I am grateful to my advisor Kyle Bagwell for his invaluable guidance. I thank the editor and two anonymous referees for their helpful suggestions. I also benefited from the comments of Atila Abdulkadiroğlu, Eiichi Miyagawa, Michael Riordan and Raphael Thomadsen.

Abstract

I examine collusive bidder behavior in auctions with negative externalities and show that the optimal bidding scheme exhibits only partial rigidity. Because of externalities, a cartel not only has incentive to maximize gains from trade but also to minimize the probability of sales. I identify the tension between the two incentives and show that the more rigid the bidding scheme, the higher the possibility of sales. As the extent of externalities increases, the cartel finds it more important to keep a low probability of sales than to minimize payment to the seller. This results in a partially-rigid optimal collusive bidding scheme.

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