Tilburg Law and Economics Center

TILEC supports and stimulates academic research on the governance of economic activity. It fosters academically path breaking and practically relevant research and aims to be a leading center worldwide.

Gyula Seres on information disclosure and bid rigging in auctions

Sellers have long been thought to benefit from disclosing information about the object they want to auction off. But could disclosure facilitate collusion among bidders, thus hurting sellers?

A well-known result in auction theory, known as the Linkage Principle, holds that sellers should disclose any information relating to the object that affects all buyers' valuations similarly (the so-called common-value component). The idea is that reducing information asymmetries among buyers leads to more competitive bidding and thus higher revenue for the seller. In TILEC Discussion Paper No. 2017-026, entitled "On the Failure of the Linkage Principle with Colluding Bidders", TILEC extramural fellow Gyula Seres examines the validity of the linkage principle when bidders can collude.

He studies environments with both a common-value and a private-value component and assumes that the seller can disclose information that reduces the variance of the common-value component. Collusion, if it occurs, involves bidders exchanging information about valuations. The collusive agreement is such that the highest-valuation bidder makes the only bid and compensates the others through side-transfers. Gyula shows that in a pure common-value setting, bidders are unable to collude. This is because disclosing information affects everybody's valuation in the same way and is therefore not incentive compatible. In a pure private-value setting, information disclosure is incentive compatible as it does not affect the other bidders' valuations; hence collusion is possible. Disclosing information moves the environment towards the pure private-value setting, thus facilitating collusion.