Problem 1 Imagine that 3 bidders want to buy a good in a sea

Problem 1. Imagine that 3 bidders want to buy a good in a sealed-bid auction. The 3 bidders come secretly together (they form a so-called \"bidding ring\") and discuss their positions. They find out each other\'s values. Suppose the A\'s value is 9, B\'s value is 8 and C\'s value is 3. For simplicity, assume that only integer bids are allowed in the auction. (a) First, suppose the auctioneer uses a second-price sealed-bid auction. What kind of collusive arrangement would you imagine the bidders agree on? Would it be possible or likely for one of the bidders to cheat on the collusive arrangement? (b) Now suppose the auctioneer uses a first-price sealed-bid auction. What kind of collusive arrangement would you imagine the bidders agree on in this case? Would it be possible or likely for one of the bidders to cheat on the collusive arrangement? (c) Suppose you are an auctioneer and you are worried about bidder collusion. Which of the two auction types would you prefer to use so as to minimize the likelihood of collusion or in order to maximize the sale price?

Solution

An offering ring is a gathering of people or organizations that conspire to keep low the costs of benefits available to be purchased at sell off by not offering against each other. Offering rings are a type of conspiracy to enable every part to get the best cost to the rejection of non-individuals.

a) When the auctioneer uses second-price bid auction, every bidder presents a fixed offer to the auctioneer. The high bidder wins and pays the second-most noteworthy offer for the good.

Sellers can work on spying on the bids and then insert an unreal/fictitious bid in a move to increase the payment of the winning bidder.

Yes, it is likely for one of the bidders to cheat on the collusive arrangement by inserting a fictitious bid of high price but lower than the highest bidder\'s bid to ensure that the winning bidder has to pay more.

b)When the auctioneer uses first-price sealed-bid auction,every bidder submits just a single offer, regularly in writing, and normally in mystery from alternate bidders. When all offers are submitted, they are assessed by the auctioneer, and the high bidder wins and pays the measure of its offer.

No, it is less likely for one of the bidders to agree on a collusion in this case. Keeping in mind the end goal to secure a conniving increase, the cartel must drop the offer of its most astounding valuing member underneath what it would have offered acting non-agreeably. The diminishment in this offer opens the entryway for freak conduct and distortions by offer individuals. All things considered, by marginally outbidding this diminished offer, a ring part may understand a pick up that it never could have acknowledged when the most elevated esteeming bidder acted non-cooperatively. Collusion is therefore difficult as it almost surely requires ex-ante communication.

c) As an auctioneer, I would have prefered to use first-price sealed bisd auction as it has lesser chances of collusion and higher chances of maximizing the sale price.