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Tacit Collusion in Auctions and Conditions for Its Facilitation and Prevention: Equilibrium Selection in Laboratory Experimental Markets

Li, Jin and Plott, Charles R. (2005) Tacit Collusion in Auctions and Conditions for Its Facilitation and Prevention: Equilibrium Selection in Laboratory Experimental Markets. Social Science Working Paper, 1223. California Institute of Technology , Pasadena, CA. (Unpublished)

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The paper studies bidder behavior in simultaneous, continuous, ascending price auctions. The purpose is to create (possibly extreme) conditions under which tacit collusion develops quickly, naturally and reliably; study models of its development, and then study institutional and environmental remedies that would cause it to evolve into competitive behavior. Special environments were implemented with a purpose of creating good conditions for the development of tacit collusion. The special environments were based on a type of public, symmetrically “folded” preferences together with what we call “item-aligned” preferences. Once tacit collusion developed, remedies were implemented and the success of the remedies in promoting competitive behavior was studied. The results are as follow. (1) The environmental conditions do foster tacit collusion. (2) The tacit collusion corresponds to the unique buyer Pareto Equilibrium of a game theoretic model of the auction process. (3) Once tacit collusion developed, it proved remarkably robust to institutional changes that weakened it as an equilibrium of the game theoretic model. (4) The only remedy that was clearly successful was a nonpublic change in the preference of participants that destroyed the symmetrically, “folded” and “item aligned” patterns of preferences, creating head to head competition between two agents reminiscent of the concept of a “maverick”.

Item Type:Report or Paper (Working Paper)
Additional Information:The support of the National Science Foundation, and the Caltech Laboratory for Experimental Economics is gratefully acknowledged. Comments from Katerina Sherstyuk, Joseph Cook, and participants in the Caltech seminar on laboratory methods in economics and political science were very helpful.
Group:Social Science Working Papers
Funding AgencyGrant Number
Caltech Laboratory for Experimental Economics and Political ScienceUNSPECIFIED
Subject Keywords:tacit collusion, information, auctions, game theory
Series Name:Social Science Working Paper
Issue or Number:1223
Classification Code:JEL: L50, L94, D43
Record Number:CaltechAUTHORS:20170808-160459422
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79979
Deposited By: Hanna Storlie
Deposited On:09 Aug 2017 16:57
Last Modified:03 Oct 2019 18:26

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