A Study of the Internal Organization of a Bidding Cartel

Abstract

When bidders in an auction collude-and, thus, reduce competitive bidding pressure-the resulting cartel is known as a "bidding ring." A ring can take many forms. An extensive theoretical literature exists that explores optimal ways to organize ring activity, given the form of target auction that the ring is seeking to exploit (see, for example, Daniel Graham and Robert Marshall 1987;R. Preston McAfee and John McMillan 1992; Andzrej Skryzypacz and Hugo Hopenhayn 2004; and Kenneth Hendricks, Robert Porter, and Guofu Tan 2003). Empirical work on ring activity has tended to focus on issues of ring detection (see Joseph E. Harrington Jr. 2008 for a survey). The detection of collusion and the determination of damages rely on drawing distinctions between market conduct with, and without, an active ring. Hence, understanding the practicalities of ring conduct is central to this endeavor. This paper contributes to this understanding by documenting and analyzing the conduct of a ring in the market for collectible stamps in North America that lasted for over 15 years.The data used in this study comprise a record of the ring's activities for an entire year, including sidepayments, detailed bidding behavior in the internal "knockout" auction that the ring used to coordinate its activities, and data on the associated "target" auctions. These data are, as far as I am aware, unique.1 In addition to providing documentation of the way that this long-running ring operated and the practical problems that it faced, these data allow an assessment of the damages that the ring imposed, who suffered the damages, the extent to which market ef ciency was compromised, and by how much the ring bene ted from its operation.The results emphasize three aspects of ring conduct. First, the internal coordinating mechanisms employed by a ring can lead to inef cient market allocations, even in an English target 1 The closest comprehensive dataset of which I am aware are the nancial records of a drug dealing organization analyzed by Steven Levitt and Sudhir Venkatesh (2000). A Study of the Internal Organization of a Bidding Cartel

Debarment and Collusion in Procurement Auctions

“…To avoid this, side payments can be implemented to induce bidders to truthfully reveal their private costs in a PAKT (McAfee and McMillan, 1992). PAKT have been used by various bidding rings over the last 200 years, covering auctions for antique books, stamps, paintings or farm land (Asker, 2010). In a first-price PAKT, the bid is an offer to operate a side payment to the other ring member (Krishna, 2010).…”

“…Note that in weak bidding rings -such as those involving bid rotation schemes -transfers cannot be enforced. In order to avoid potential confounders such as trust and cheating, we built on existing evidence of strong bidding rings (McAfee and McMillan, 1992;Asker, 2010) and designed our experiment to allow for a PAKT (see also Hu et al, 2011;Noussair and Seres, 2017).…”

“On a Level with Dentists?” Reflections on the Evolution of Industrial Organization

“…Moreover, Asker's (2010) work on a bidding cartel and Ho's (2009) study of hospital-insurer networks are counter-examples indicating that even without such collaboration it is possible to combine deep knowledge of institutional facts with rigorous use of modern modeling and estimation techniques.…”

Registered cartels in Austria: an overview

“…Most closely related to our paper is the study of Finnish legal cartels by Hyytinen et al (2014), identifying common patterns across cartel contracts within a specific legal environment. We also rely on insights from detailed case studies and empirical analysis of individual cartels in both legal and illegal environments including Genesove and Mullin (2001), Asker (2010) and Röller and Steen (2006) to develop the categories used to describe the cartels. While the contract clauses used by legal cartels may offer useful insights for the detection of illegal cartels, we emphasize also that comparing cartels in legal and illegal environments is not straightforward.…”