Essays in Auctions and Collusion

Author:

Schulenberg, Steven P.

Graduate Program:

Economics

Degree:

Doctor of Philosophy

Document Type:

Dissertation

Date of Defense:

May 02, 2003

Committee Members:

Robert Clifford Marshall, Committee Chair/Co-Chair
Herman J Bierens, Committee Member
Ronald Lee Filippelli, Committee Member
J Tomas Sjöström, Committee Member

Keywords:

Auctions
Collusion

Abstract:

This thesis is composed of four chapters. The first chapter is titled "The Impact of Cost Synergies on Bidding in the Georgia School Milk Market," co-authored with Robert C. Marshall, Matthew E. Raiff, and Jean-Francois Richard. Each summer milk processors around the country participate in sealed bid procurements for the right to provide public schools with milk throughout the subsequent academic year. School district contracts are an important part of vehicle routing problems that milk processors solve on an ongoing basis. There are allegedly substantial cost savings for a milk processor from servicing a district that is directly adjacent to one they already service. In this paper, following the work of Krishna and Rosenthal (1996), we construct a procurement model allowing for cost synergies. The equilibrium bid function maps directly into an empirical specification. Using data from a time period when bidders were allegedly acting non-cooperatively, our structural parametric estimation results give significant support for the presence of cost synergies in the bidding. This essay demonstrates that a market outcome that is consistent with the division of the market among cartel members is also consistent non-cooperative behavior, indicating that a test for the presence of collusion in this market should consider these synergies or will risk “over-detecting” collusion. The second chapter is titled "Numerical Analysis of Asymmetric Auctions with Optimal Reserve Prices," co-authored with Robert C. Marshall. We numerically calculate equilibrium bids and optimal seller reserve prices for first price auctions within the independent private values framework where two bidders draw their valuations from heterogeneous distributions. In particular, we consider a type of bidder asymmetry that may result from collusion. In contrast to the case of a zero reserve price, once optimal reserve prices are introduced first price auctions no longer dominate second price auctions in terms of expected revenue for the seller. In fact, for the cases examined herein, the opposite is true. There are two main conclusions that we draw from this. First, most of the literature has focused on the case of a zero reserve price. Our paper shows that results that hold with a zero reserve price may not also hold when optimal reserve prices are introduced. Second, there may be situations where auctioneers facing collusive bidders will maximize revenue when using a second price auction. This is contrary to the intuition that first price auctions are less susceptible to cartels than first price auctions, and are therefore preferable. The third chapter is titled "Optimal Reserve Prices at First and Second Price Auctions with Endogenous Coalition Formation." This extends the second essay to consider two coalitions of bidders that form endogenously. In general, the incentive to form a cartel given an auction type will change as the reserve price changes. This essay first shows how the incentives to form a cartel change with the reserve price. Then, it is shown that when coalitions of bidders form endogenously as predicted by the recursive-core, a more sophisticated choice of the reserve price by the auctioneer (relative to the choice in the second essay) can affect the coalitions that result in such a way to again make first price auctions revenue dominate second price auctions even when there is a relatively small number of bidders. The fourth chapter is titled "Improving the Corporate Leniency Policy." The United States Department of Justice (DOJ) has instituted the Corporate Leniency Policy, which allows a single member of a cartel to receive amnesty from criminal punishment in exchange for substantial evidence against the remainder of the cartel. This has been heralded as the most effective weapon against collusion, and has been involved with most recent antitrust litigation. Using the Davidson and Deneckere (1990) model and outcomes as a baseline, an antitrust policy without leniency results in more collusion. The addition of leniency still results in more collusion than in Davidson and Deneckere, but not as much as with just the antitrust policy. However, including a bounty with leniency can improve the situation (from the view of the DOJ) if the criminal fines are sufficiently large.