DIVISION OF THE HUMANITIES AND SOCIAL SCIENCES CALIFORNIA INSTITUTE OF TECHNOLOGY PASADENA, CALIFORNIA 91125 Tacit Collusion in Auctions and Conditions for Its Facilitation and Prevention: Equilibrium Selection in Laboratory Experimental Markets

Tacit Collusion in Auctions and Conditions for Its Facilitation and Prevention: Equilibrium Selection in Laboratory Experimental Markets Jin Li Massachusetts Institute of Technology Charles R. Plott California Institute of Technology The paper studies bidder behavior in simultaneous, continuous, ascending price auctions. The purpose is to create (possibly extreme) conditions under which tacit collusion develops quickly, naturally and reliably; study models of its development, and then study institutional and environmental remedies that would cause it to evolve into competitive behavior. Special environments were implemented with a purpose of creating good conditions for the development of tacit collusion. The special environments were based on a type of public, symmetrically “folded” preferences together with what we call “item-aligned” preferences. Once tacit collusion developed, remedies were implemented and the success of the remedies in promoting competitive behavior was studied. The results are as follow. (1) The environmental conditions do foster tacit collusion. (2) The tacit collusion corresponds to the unique buyer Pareto Equilibrium of a game theoretic model of the auction process. (3) Once tacit collusion developed, it proved remarkably robust to institutional changes that weakened it as an equilibrium of the game theoretic model. (4) The only remedy that was clearly successful was a nonpublic change in the preference of participants that destroyed the symmetrically, “folded” and “item aligned” patterns of preferences, creating head to head competition between two agents reminiscent of the concept of a “maverick”.