Economic Theory Seminar Series: Collusion in auctions: an informed principals perspective

Benjamin Balzer | University of Technology, Sydney 

We analyse collusion in second-price and first-price auctions of an indivisible good with independent private values. One bidder acts as principal and proposes to the other bidder, the agent, a collusive side mechanism, the play of which allots the enforceable right to be the only bidder in the auction. The proposal can reveal the principal's private information, influencing the play of the mechanism, the agent's acceptance decision, and the non-cooperative play of the first-price auction. In the second-price auction, the cartel's joint profit-maximizing benchmark of efficient collusion, which arises when the bidder with the highest valuation receives the right to bid, cannot always be supported in a perfect Bayesian equilibrium. In the first-price auction, the equilibrium is unique and dominated by the least inefficient equilibrium of the second-price auction (w.r.t. welfare and joint profits). The developed solution technique applies to informed principal problems relative to arbitrary default games.