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Bidding rings and the winner's curse
Author(s) -
Hendricks Ken,
Porter Robert,
Tan Guofu
Publication year - 2008
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/j.1756-2171.2008.00048.x
Subject(s) - collusion , common value auction , bidding , economic rent , microeconomics , value (mathematics) , private information retrieval , lease , economics , marginal value , government (linguistics) , winner's curse , investment (military) , auction theory , business , industrial organization , finance , politics , computer science , linguistics , philosophy , computer security , machine learning , political science , law
This article extends the theory of legal cartels to affiliated private value and common value environments. We show that efficient collusion is always possible in private value environments, but may not be in common value environments with a binding reserve price. In the latter case, collusion does more than simply transfer rents from the seller to the buyers, it also gives buyers a chance to pool their information prior to trade and make an efficient investment decision. However, full efficiency may not be compatible with information revelation. Buyers with high signals may be better off if no one colludes, leading to inefficient trade. This result provides a possible explanation for the low incidence of joint bidding, especially on marginal tracts, in U.S. federal government offshore oil and gas lease auctions.