EPIC Fail: How Below-Bid Pricing Backfires in Multiunit Auctions
Research Seminars: Virtual Market Design SeminarAuctions with below-bid pricing (e.g., uniform-price, and ascending auctions) have remarkable theoretical properties, but practitioners are skeptical about their implementation. The authors 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. Their 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 auctions of fishing quota in the Faroe Islands supports our predictions.
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