Testing for Anti-Competitive Bidding in Auction Markets

The British Columbian Ministry of Forests proposed an auction design to achieve fair market prices for its standing timber. Because the Crown owns almost all the standing timber in British Columbia, the Ministry proposed to auction a portion of that timber, and use the auction prices to set stumpage rates for timber under long-term tenure. In this manner, the private industry, and not the Crown, will set the supply and equilibrium price of timber in British Columbia. Once implemented, we believe that this market will function properly. However, the Ministry must pay careful attention to bidder’s actions at auction to ensure that competition is strong. In particular, because auction prices are used to price tenured stands, a tenure holder may have incentive to alter auction prices, and thus modify the equation that determines stumpage rates for tenured timber in its favor. Thus, the Ministry must monitor carefully the auction market for cheating or collusion. Testing for the effects of collusion in auctions often proves difficult even when a-priori knowledge of cheating is available. Still, certain general methods are available to test for the most common form of collusion in auctions.