A Study of the Internal Organization of a Bidding Cartel

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. 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