"Epic Fail: How Below-Bid Pricing Backfires in Multiunit Auctions"

• Main Authors: Sanna Laksá, Daniel Marszalec, Alexander Teytelboym
• Format: Report
• Language: unknown
• Subjects: Faroe Islands
• Online Access: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2018/2018cf1096.pdf

Auctions with below-bid pricing (e.g., uniform-price, ascending, and Vickrey auctions) have remarkable theoretical properties, but practitioners are skeptical about their implementation. We present a dynamic model of collusion in multiunit auctions that explains this gap between theory and practice. To sustain collusion at the reserve price, bidders submit crank-handle bids. The cost of sustaining crank-handle collusion depends on the degree of below-bid pricing in the auction. Our model predicts that crank-handle collusion is easier to sustain in auctions with more below-bid pricing and when bidders are more symmetric. Evidence from uniform-price, ascending, and pay-as-bid auctions of fishing quota in the Faroe Islands is in line with our predictions.