Overbidding in Auction Rings

This paper proposes a novel cartel mechanism. For cooperative bidding, ring members receive a compensation that depends on their pre-auction bid, which by cartel mechanism design depends on their valuation in equilibrium. Rather than receiving a lump sum transfer, as is proposed by most economic literature on collusive practices at auctions, ring members are compensated proportionately, to the extent to which they have contributed to a lower price at the main auction. While this creates incentives in favor of untruthful bidding, it is preferred by those bidders with high valuations, who are typically the initiators of cartel practices. The main results are that given the model’s specifications, (1) bidding one’s valuation in the pre-auction is suboptimal; and (2) an equilibrium is characterized in which it is optimal for ring members to overbid in the pre-auction