Auction Mechanisms and Bidder Collusion: Bribes, Signals and Selection

The theoretical literature on collusion in auctions suggest that the first-price mechanism can deter the formation of bidding rings. In equilibrium, collusive negotiations are either successful or are avoided altogether, hence such analysis neglects the effects of failed collusion attempts. In such contingencies, information revealed in the negotiation process is likely to affect the bidding behaviour in first-price (but not second-price) auctions. We test experimentally a setup in which collusion is possible, but negotiation often break down and information is revealed in an asymmetric way. The existing theoretical analysis of our setup predicts that the first-price mechanism deters collusion. In contrast, we find the same level of collusion in first-price and second-price auctions. Furthermore, failed collusion attempts distort the bidding behavior in the ensuing auction, leading to loss of efficiency. Our results suggest that the application of the theoretical results to auction design may backfire, and should therefore be applied with caution.