The Value of Privacy in Cartels: An Analysis of the Inner Workings of a Bidding Ring

Abstract

We study how incentive constraints can be relaxed by randomization in a repeated-game setting. Our study is motivated by the workings of a detected bidding cartel that adopted a protocol of keeping the winning bid secret from the designated losers when defection was a concern. Keeping the winning bid secret makes accurately undercutting the winning bid more difficult and makes defection less attractive as potential defectors risk not winning the auction even if they deviate. We formalize these ideas in the context of a repeated-game setting and show that a cartel can attain higher payoffs by having the pre-selected winner randomize its bid and keep it secret from other members. Calibration of the model to the bid data of the cartel suggests that randomization may increase firms’ profits by about 56%.