How can auction design prevent collusion among bidders?

2 Auction format and information

One of the factors that influences the likelihood and degree of collusion is the auction format and the information available to the bidders. Generally, collusion is easier in auctions that reveal more information about the bids and the bidders, such as open or ascending auctions, where bidders can observe each other's actions and coordinate their strategies. On the other hand, collusion is harder in auctions that conceal more information, such as sealed-bid or descending auctions, where bidders have to guess each other's values and bids. Moreover, collusion is more likely in auctions that have repeated interactions, common values, or resale opportunities, as these factors can facilitate communication, monitoring, and enforcement among the colluders.

3 Auction rules and penalties

The incentives and feasibility of collusion can be affected by the auction rules and the penalties for collusive behavior. To prevent or deter such behavior, auction designers can introduce a reserve price, an entry fee, a bid cap, bid rotation, bid disclosure, and antitrust laws. A reserve price is a minimum acceptable bid to discourage low bids and increase revenue. An entry fee is a non-refundable fee that bidders have to pay to participate in the auction, raising the cost of collusion and deterring entry by low-value bidders. A bid cap limits the scope for joint bidding and reduces the surplus available for sharing. Bid rotation requires bidders to take turns in winning the auction, breaking the symmetry among colluders and inducing more aggressive bidding. Bid disclosure requires bidders to reveal their identities and bids after the auction, increasing the risk of detection and prosecution of collusion. Antitrust laws are a legal framework that prohibits and punishes collusive behavior in auctions and other markets, imposing fines, sanctions, or criminal charges on colluders.