Auctions and Bid Rigging

An auction is “a market institution with an explicit set of rules determining resource allocation and prices on the basis of bids from the market participants” (McAfee and McMillan, 1987).1 Auctions are among the oldest market institutions; “marriage auctions” for brides were used in Babylon as early as 500 BC. Products commonly bought and sold using auctions include art and jewelry, US Treasury Bills, used cars, the assets of bankrupt companies, and radio spectrum. Auctions are also commonly used in the government procurement of goods and services. Online auctions comprise a significant portion of the rapidly growing electronic commerce marketplace. Auction theory provides an explicit model of price formation. Traditional models of competition that furnish equilibrium prices given demand and supply characteristics, such as Cournot and Bertrand models of competition, do not explain the price-formation process in terms of buyer-seller interactions. In contrast, auction mechanisms explicitly lay out rules that govern the formation of prices. A typical auction consists of a single auctioneer, responsible for selling an object, and a number of bidders who wish to buy the object. The auctioneer may announce a reserve price, that is, the