The Value of Privacy in Cartels: An Analysis of the Inner Workings of a Bidding Ring
We study the inner workings of a bidding cartel focusing on the way in which bidders communicate with one another regarding how each bidder should bid. We show that the designated winner of the cartel can attain higher payoffs by randomizing its bid and keeping it secret from other bidders when defection is a concern. Intuitively, randomization makes defection less attractive as potential defectors face the risk of not winning the auction even if they deviate. We illustrate how our theoretical predictions are borne out in practice by studying a bidding cartel that operated in the town of Kumatori, Japan.
We are especially thankful to Sylvain Chassang, for many stimulating conversations on the topic of collusion, and to Mr. Masayoshi Oura for providing us the data and answering questions about the cartel. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.