Combinatorial Procurement Auctions a Collusion Remedy? *

Transcription

1 Combnatoral Procurement Auctons a Colluson Remedy? * by Anders Lunander * and Jan-Erc Nlsson ** June 004 Abstract Ths paper presents the outcome of an experment where dfferent procurement aucton mechansms are compared to allocate multple contracts that exhbts non-lnear cost. A standard one shot sealed bd mechansm and a combnatoral aucton used. Both mechansms are frst run wthout, and then wth the possblty for subjects to communcate pror to bddng over a chat lne. It s demonstrated that the combnatoral mechansm s able to enhance effcency. Subjects are also less nclned or able to cooperate under the combnatoral aucton than under the standard bddng format. The paper therefore provdes ndcatons of that the possblty to submt combnaton bds may throw some sand nto collusve schemes. Key words: colluson, combnatoral aucton, multple object auctons, procurement mechansms JEL Classfcaton: C90, D44 * We are grateful for comments on prevous versons from Lance Brännman, Arne Andersson and partcpants at the 003 North Amercan Meetng of the ESA. Fundng from the Swedsh Competton Authorty, the Natonal Ral Admnstraton and from Vnnova s gratefully acknowledged. * Department of Economcs, Örebro Unversty, SE Örebro, Sweden; e-mal: anders.lunander@es.oru.se ** Swedsh Natonal Road and Transport Research Insttute, Box 670, SE Borlänge, Sweden e-mal: jan-erc.nlsson@vt.se 1

2 1. Introducton Many publc procurement auctons comprse a large number of dentcal or smlar contracts allocated at the same tme. One example s the procurement of servces for cleanng local communty offces, schools and homes for elderly etc. Durng fall 00, Stockholm Cty Councl for nstance nvted bds for 168 separate objects of ths nature. Another example s the procurement of contracts for road mantenance actvtes. The Swedsh road authorty annually lets about 50 smlar contracts for pantng of road markngs. Moreover, the market for road pavement renewals at the natonal level ncludes some 100 objects per year, costs addng up to substantal amounts of money. One concern wth the smultaneous lettng of many smlar contracts s that entrepreneurs costs may not be lnear n the number of contracts awarded. Because of capacty constrants, small frms may have low ntal costs that ncrease wth the number of contracts whle large frms, wth extensve capacty, may have consderable scale economes n wnnng an ncreasng number of contracts. As a result, a standard one shot, sealed bd procurement aucton may fal to allocate contracts effcently. In such cases, the uses of more flexble bddng mechansms, lke the smultaneous ascendng (descendng) auctons or combnatoral auctons have shown to ncrease effcency and lower the procurer s cost (seller s revenues). 1 A second concern s that the smultaneous or sequental lettng of a large number of smlar contracts facltates coordnaton of bdder behavor. The contracts may be awarded for short tme perods, often for a year at a tme, and then agan up for bddng. Ths makes t possble for colluders to punsh possble devators from an agreement soon after that a break takes place. Anecdotal evdence also suggests that bdders sometmes wn a larger number of 1 See Lunander & Nlsson (004) for a lstng of some studes.

3 contracts than they have capacty to handle and therefore have to negotate wth the bdders that have not won contracts.e. that have free capacty to be able to honor ther submsson. Ex post communcaton of ths sort lowers the barrer for ex ante communcaton at subsequent events. Colluson and bd rggng schemes s a serous problem n many auctons and the number of studes wthn the aucton lterature addressng dfferent aspects of collusve behavor grows (see for example summares n Pesendorfer 000, Krshna 00 and Aoyag 003). One branch of these studes nvestgates bddng behavor n multple-object auctons when bdders collude by sgnalng or communcatng. The research on sgnalng has to a large extent been nspred by the allocaton of spectrum lcenses n the US, where a multple-object verson of the Englsh aucton the smultaneous multple-round aucton (SMA) was used. Although the SMA has many advantages, one concern s that t s lkely to be more vulnerable to colluson than the sngle-object Englsh aucton. Cramton and Schwartz (000) dscuss dfferent knds of bd sgnalng for collusve ends that occurred n the FCC auctons and how the SMA desgn can be modfed to make lfe more dffcult for colluders. Brusco and Lopomo (00) show that n a prvate values model wth two objects, bdders can take advantage of the sgnalng opportuntes provded n the SMA to ncrease ther expected surplus. The coordnaton by sgnalng, however, becomes more dffcult as the number of bdders ncreases, keepng the number of objects fxed. They also show that the sze of any complementartes does not affect the lkelhood for collusve behavor. Furthermore, Kwasnca and Sherstyuk (003) study bdder behavor n laboratory ascendng auctons for For studes on sgnalng n a sngle object envronment, see for example Sherstyuk (1999, 00) 3

4 multple objects wth and wthout complementartes, not allowng for communcaton. Ther experment ndcates that large complementartes do make colluson less lkely. A couple of aucton experments wth multple objects analyze bddng behavor when bdders are allowed to engage n pre play communcaton. Kwasnca (000) analyses the choce of cooperatve strateges n prvate values sealed bd auctons. In hs experment fve subjects bd n fve smultaneous sngle object frst prce sealed bd auctons. Allowng hs subjects to communcate between perods, he found that bdders formed collusve agreements and n general used bd rotaton as strategy, that s, each of the fve bdders was selected to be the sole bdder on one contract each. 3 Phllps et al (003) nvestgate bddng behavor n repeated laboratory Englsh auctons of multple objects. Bdders are gven decreasng redempton values for eght objects, where the auctoneer sells one object at a tme. Between 19 objects and 30 objects are sold n each repeated aucton, and the experment compares the outcome from a two-buyer that of a sx-buyer market. In both types of markets, bdders were n some sessons allowed to communcate through a chat box pror to bddng. When bdders are allowed to communcate data ndcate that the average wnnng bd s 50-60% of the object s compettve value. More surprsngly, however, s that the colluson n the n the sxbuyer market s smlar to that n the two-buyer market. The reason s sad to be that n the two-buyer market, bdders seek equty comparng earnngs and adjustng dfferences - when colludng, whch opens the door for dsagreement, whle n the sx-buyer market bddng rngs are based on smple bd sharng plans. 4 A related theoretcal study s Aoyag (003) whch presents a dynamc bd rotaton scheme where bdders collude through communcaton n repeated auctons. In ths envronment, bdders that communcate can compensate each other through dynamc bd rotaton nstead of usng sde payments. 3 Subjects were, however, nether allowed to reveal ther prvate values nor to dscuss the use of sde payments. 4 See also Goswan et al (1996) for an experment on the effect of pre play communcaton n unform-prce and dscrmnatory auctons of share. 4

5 Wthn the multple objects aucton envronment, very few studes have nvestgated cooperatve agreements n combnatoral auctons. Kelly and Stenberg (000) descrbe a combnatoral aucton procedure whch essentally s a smultaneous multple-round aucton, but where bdders are allowed to submt package bds at a later stage of the aucton. The aucton mechansm should make t more dffcult for prce-level sgnalng and thus reduce the possblty of colluson. Based on a wnd-tunnel experment, the purpose of our study s to test how vulnerable combnatoral auctons are to collusve behavor. In partcular, we consder the role of pre play communcaton n dfferent types of sealed bd procurement auctons where the procurer seeks to acqure multple contracts wth cost complementartes. One dfference between our envronment and that of prevous experments on colluson n multple object auctons s that we, except for the human subjects, also make use of a computerzed bdder that cannot be part of any collusve agreement. Ths mmcs the potental threat from outsders that the members of a cartel have to take nto account when formng cooperatve agreements. The purpose of ths paper s to see whether bddng behavor n general, and the choce of cooperatve strateges n partcular, s affected by the opton to submt bundle bds, gven complementartes and the presence of an automata bdder. Do bdders have more dffcultes to collude under a combnatoral aucton than under standard smultaneous sealed bd aucton? Our conjecture s that the combnatoral envronment creates fewer ncentves for bdders to set up and mantan a cartel as a means to fully realze synerges. A bdder can fully explot synerges usng bundle bds wthout facng the exposure problem and thereby bd more compettvely aganst non-cartel bdders. 5

6 To ths end, the paper systematcally compares the allocaton effcency and the partcpants behavor n three dfferent mechansms. The frst s a standard one shot sealed bd aucton; the second s the same mechansm but wth scale effcences n the number of contracts awarded; and the thrd s a combnatoral aucton also wth scale economes n the number of contracts. Each sesson frst ncludes eght perods wth the base-lne desgn followed by a number of perods where subjects are able to communcate va a chat lne pror to bddng n each perod. Our results ndeed ndcate that subjects are less nclned to form collusve agreements n a combnatoral aucton than n the standard frst prce aucton when synerges are present. Also, the combnatoral aucton generates hgher effcency and lower procurement cost. The paper starts wth a short descrpton of the recent dsclosure of a bddng rng for pavement contracts (secton ). We then present the expermental desgn (secton 3) and the results (4) followed by a summary (5).. The Swedsh Asphalt Cartel In 001, Konkurrensverket (the Swedsh Competton Authorty, KKV henceforth) receved ndcatons of that bds for most asphalt contracts n the southern part of the country, for several years had been coordnated n beforehand by entrepreneurs that were supposed to compete. An asphalt contract concerns the cookng of btumen and stone, the transport of the asphalt mx to where t s to be lad and the spreadng of the mx. Both the Natonal Road Admnstraton, n charge of the natonal road network, local communtes (the thrd ter of the country s publc sector) handlng the local road network and prvate customers buy asphalt. 6

7 After a dawn rad, KKV therefore made an applcaton for a summons for a fee totallng almost SEK mllon (US$ 00 mllon) from 9 dfferent defendants. KKV clams that at least snce 1995, representatves for four major companes (whch ncluded the two overall largest buldng enterprses n Sweden) have met several tmes per year n the dfferent regons where they have been actve. The purpose of these meetngs was to establsh how natonal, local and prvate contracts for asphalt works were to be splt between the companes and to control for the outcome of agreements struck the year before. Informaton about volumes and prces were exchanged. The partes are also sad to have had hoc meetngs and conversatons over the phone. Snce resurfacng can only be done durng the warmest 5-8 months of the year, asphalt contracts are typcally awarded at the begnnng of each year. Before the start of a new bddng process, the four companes have splt contracts between them prmarly accordng to ther respectve market shares n dfferent regons; f company A had 40 percent n one regon and 10 percent n another, ths was accounted for. The desgnated wnner coordnated the bddng behavor for each contract; ths was referred to as to gve and take prce. Another part of the coordnaton was to award potental compettors for abstanng from bddng or for submttng non-compettve bds. The outsde, smaller frms were remunerated by beng awarded sub-contracts, by beng provded wth servces that never were charged for or by beng pad aganst nvoces for work whch was never done. In sngle cases where the four companes could not agree, there was an actual competton for the contract. At least at one occason, the gang of four has tred to keep an entrant out of one of the regonal markets. The mechansm seems to have been to threaten the (potental) entrant that he would have dffcultes to buy nputs such as btumen, vtal for the producton process, 7

8 from some of the domnant frms n control of that nput. It should be noted that one of the four large companes s a wholly owned subsdary of the Natonal Road Admnstraton The Expermental Desgn The three core features of our procurement experment are the non-lnearty of costs, the rsk for colluson and the possblty to use combnaton bds to curb the propensty to collude. To start wth the cost aspect, ths was handled n the followng way. Subjects were nvted to submt bds for two dentcal objects, A and B. Under the frst treatment, the standard oneshot sealed bd aucton, bds on A and B were submtted smultaneously and evaluated ndependently and contracts awarded to the lowest bdder. Costs c, =A,B were nduced by ndependent draws from a unform dstrbuton wth the support [00, 300]. Under the second and thrd treatments, subjects had scale economes n that the cost for each object decreased wth 10 or 0 percent two dfferent scale parameters were tested f the same subject won both tems. Profts (π) for a bdder j submttng the lowest bd j b ~ on both objects =A, B and j therefore awarded both contracts was therefore π (α=0.8 or 0.9). ~ = b α c j j where α s the scale factor The second feature of the experment was to desgn a structure that allowed for colluson. In order to make t as smple as possble for bdders to collude, only two physcal subjects plus an automated bdder were submttng bds for the contracts. Computer bds were used to avod makng the colluson sessons trval. Subjects were nformed that the computer would always submt a bd bˆ = c wth c ndependently drawn from the same dstrbuton as for the 3 human subjects. bˆ s the Rsk Neutral Nash Equlbrum (RNNE) predcton for an optmal 5 The Road Admnstraton no longer has n-house resources but procures all constructon and mantenance actvtes on a compettve bass. 8

9 bd wth three players havng constant costs drawn from the dstrbuton U ~ [ 00,300] draw of 40 would therefore generate a bd of 60 and the computer would never bd below 33 or above 300. The computer had no scale economes n the number of contracts awarded.. A The colluson desgn was benchmarked aganst an ntal number of perods where bdders could not communcate, where after a chat lne was opened n order to facltate colluson. Subjects were nformed about dfferent ways to cooperate; (a) after observng the cost draw, they could agree about whch bd that each was to submt; (b) they could agree to take turns, and; (c) they could let one wn all perods and share profts after leavng the classroom. The rsk of beng trcked by the other party was also emphaszed. We dd no polcng of noncompettve behavor,.e. no penaltes for colluson were metered out. The experment s thrd feature was the possblty to use combnaton bds as a means to reduce the extent of colluson. Under the thrd treatment, the two human subjects were therefore gven the possblty to submt bds not only on A and B n solaton but also on the combnaton AB. The bdder(s) behnd the combnaton of bds that generated the lowest cost.e. awardng A and B to dfferent subjects or both gong to the same was desgnated to be the wnner. To summarze, a subject was before each bddng perod nformed about whch two ndependent costs draws that had been made for her. The subject knew that the other human subject and the automated bdder were gven draws from the same dstrbuton but dd not know whch draws that others got. Based on ths nformaton, bds were to be submtted n order to maxmze profts. Our frst treatment used the standard smultaneous frst prce sealed bd mechansm to award contracts and the second treatment ntroduced non-lneartes n costs 9

10 but stll used the standard bddng prncple. Also the thrd treatment had cost non-lneartes but n addton, human subjects were gven the possblty to submt bds not only on A and B n solaton but also on the combnaton AB. Each sesson was ntated wth two (tral) perods wth an exchange rate of 0.5 followed by eght non-communcaton perods wth the exchange rate 1.5. The sesson was then fnalzed wth another eght plus a varable number of perods where communcaton was allowed, stll wth the 1.5 exchange rate. The fnal number of perods (U~[1,6]) was decded by havng the experment leader throwng a dce, whch was not shown to the subjects untl after the concluson of the experment. Ths was done to make subjects uncertan about whch perod was the fnal,.e. to curb the rsk for backward nducton. Bdders show-up fee was SEK 150, wth SEK 100 beng a guarantee amount and SEK 50 a buffer aganst losses; also ths part of the fee was to be kept f such losses were not ncurred. Importantly, each human player n the aucton was a team of two physcal ndvduals. We dd ths n order to make t feasble for the two to talk to each other, and so to enhance the chance that they grasped the nature of the problem put to them. All earnngs were therefore to be splt between the two, all beng economcs students at Örebro Unversty. Actual earnngs for the two-hour sessons ranged from SEK 50 to Results: Effcency and Costs A total of 14 expermental sessons were concluded durng sprng and fall semesters 00. Table 1 summarzes the number of sessons allocated to each treatment and the number of perods concluded. 6 At the tme of the experments, the prce for a US$ was about SEK 9. 10

11 Table 1: Number of sessons and number of perods under dfferent treatments Treatment # Sessons Thereof wth scale parameter # perods wth no chat # perods allowng for chat Total perods I. Standard II. Standard wth non-lnear costs III.Combnatoral wth non-lnear costs Sum Results from the two ntal tral perods n each sesson have been omtted throughout the analyss. We start by descrbng effcency (4.1) and cost (4.) propertes of the mechansms n ths secton. Secton 5 then reports about bddng behavor and communcaton wthn each of the three mechansms. 4.1 Effcency Our measure of effcency (E) s defned n equaton (1) where A s the actual costs for the wnners of fulfllng contracts, M s the lowest nduced cost of fulfllment and N s the expected nduced cost of a random allocaton. For each perod, N s computed as the total sum of the nduced cost of all possble allocatons of the two contracts among the three bdders. Ths sum s then dved by the number of possble allocatons, whch are (3 ) 9. Table summarzes effcency under the three treatments. A M E = 1 (1) N M 11

12 Table : Effcency Across Mechansms* Mechansm Average effcency - all perods N Average effcency - perods wth no communcaton n Average effcency - perods allowng for communcaton n I. Standard II. Standard wth non-lnear cost All α = α = III. Combnatoral wth non-lnear cost All α = α = * See Appendx for a table wth std. dev. and t-tests of mean effcency across mechansms The ntroducton of scale economes n a standard frst-prce aucton sgnfcantly reduces effcency; only an average 73 percent of potental gans are actually realzed n contrast to 9 percent when there are no scale economes. It s, however, not the possblty to communcate that affects effcency, but rather the complexty generated by the non-lnearty n costs; there s no sgnfcant dfference n effcency wthn treatments between chat and no-chat condtons. When the possblty to submt combnaton bds s ntroduced n treatment III, effcency goes back to about 90 percent. Effcency s sgnfcantly hgher wth the combnatoral than wth the standard aucton when synerges are present both n perods not allowng for communcaton and n perods allowng for communcaton. Ths confrms the favorable qualtes of the combnatoral aucton demonstrated n our prevous study (e.g. Lunander and Nlsson (003)). 1

13 4. Costs j We use the wnners profts,.e., π = b c j j, as the measure of the procurement cost n each perod. Runnng regresson equaton () on payments under treatment I where D = 1 f communcaton allowed, and excludng the computerzed bds, we obtan a sgnfcant coeffcent for the dummy varable (table 3). Hence, allowng communcaton pror to bddng ncreases the payments (procurement cost) made to the subjects. The ncrease s, however, relatvely small. π = α D cost + u, () j 1 + α + β Table 3. Estmated payments to subjects under treatment I* Varable Estmate α (1.09) D 3.17 (.8) Cost (-10.41) N 131 R 0.44 * SEK, robust standard errors, t-ratos n parenthess Fgure 1 llustrates the earnngs under treatment II and III n 104 perods (40 perods wthout and 64 perods wth communcaton), the vertcal lne ndcatng where n the sequence of perods the chat lne was opened. Payments under the combnatoral mechansm are centered on SEK 0 throughout the perods and the possblty to communcate after perod eght seems to have had lttle effect on procurement costs. The last observaton also apples to treatment II, but the dstrbuton of payments s more scattered. Also, n a number of perods, wnnng bdders n the standard mechansm (treatment II) ncurred losses due to the exposure problem. 13

14 Fgure 1. Payments under treatment II and III n dentcal perods Perod Standard wth non lnear cost Combnatoral Table 4 summarzes the payments n the two mechansms, for the whole sample and separated for weak and strong synerges. Although wnnng bdders n some perods under treatment II ncurred substantal losses whch decreases the mechansm s reported cost t s clear from table 4 that the combnatoral aucton generated sgnfcantly lower profts for bdders (.e. lower payments) than the standard mechansm. When the synergy effect of wnnng both contracts ncreases from α = 0.9 to α =0.8, the results suggest that the ncrease n procurement cost of usng the standard mechansm s greater than the correspondng ncrease n the combnatoral mechansm. Table 4: Comparson of Average Perod Payments (SEK) to Subjects Treatment II. Standard wth non lnear cost Number of perods Test statstcs (t-rato)* Envronment III. Combnatoral Whole sample Chat No chat Synergy 0.9 Chat No chat Synergy 0.8 Chat No Chat * t-tests for equal mean values across mechansms 14

15 5. Observed Bddng Behavor Results summarzed n tables and 4 ndcate that the combnatoral aucton outperforms the standard mechansm both n terms of effcency and costs to the procurer. Ths s bascally the same result as was reported n our prevous paper. However, the possblty to communcate does not seem have a strong mpact on effcency. In order to provde a deeper understandng of dfferences between envronments wthout and wth communcaton, ths secton provdes an analyss of ndvdual s bddng behavor under the respectve mechansms. We use the followng defntons of how bdders have used the opton to communcate n order to reach a collusve agreement. The frst s to dvde the market. The two human bdders then decde to take one contract each. The second type of agreement s referred to as bd rotaton. Bdders agree that one of them s to wn both contracts. Sometmes the desgnated loser abstans from bddng altogether, and at other nstances a hgh bd s submtted, sometmes even SEK 300, the hghest possble bd. 7 The thrd type of observed collusve agreement s sde payment, where one of the bdders adjusts bddng behavor n exchange for recevng remuneratons afterwards. Fnally, no agreement refers to stuatons where pre-play communcaton s not observed or where the partes have been unable to strke a deal. Table 5 summarzes the colluson behavor f any under the three treatments. Table 5: Types of pre bddng agreements under three treatments Treatment I Treatment II Treatment III Type of agreement # perods % # perods % # perods % No agreement Dvde the market Bd rotaton Sde payments Number of perods In the analyss, we have coded non-bddng as f the bd s SEK

16 In some cases but not always, nformaton about prvate costs for each contract was revealed durng the communcaton phase. There were some stuatons where one bdder may have tred to fool the other, but ths may alternatvely have been due to that the partes dd not fully understand the mplcatons of competng aganst the automated bdder. 5.1 Standard aucton wth lnear cost (treatment I) To provde a benchmark for the dscusson, we start wth analyzng the bds submtted under non-communcaton perods only. Fgure ndcates that the bddng behavor s smlar to the standard fndngs n most experments wth frst-prce sealed bd (procurement) auctons wthn the prvate values model, wth bds beng sgnfcantly below the RNNE predcton. j Usng the relevant parameter values, the RNNE bd functon s ( c) = , c (column a) reports the estmated lnear relatonshp. β 67. Table 6 Fgure : Observed and predcted bds n perods wth no communcaton (SEK) Bd Bd Nash Cost Turnng to bds under communcaton, our persstent problem s that any form of colluson means that an assgned looser submts a bd wth poor nformaton,.e. whch may defy any systematc analyss whch tres to capture the logc of these bds. Even f only a few bds are rgged n ths way, ths may destroy the possblty to derve any valuable nformaton from 16

17 the dataset of all bds. To take a broad grp over data, we therefore present observed bddng behavor both when all bds that have been submtted (columns (a) and (b) n table 6) are ncluded and also the wnnng bds only (columns (c) and (d)). Throughout the analyss, bds from the computerzed bdder are excluded. In ths stuaton, the optmal bd for the person assgned to be wnner and who competes only wth the computerzed bdder can be derved from the expected proft Π = ( b c ) ( Pr[ 0,67c b ]) functon β ( ) 1, generatng the bd c = , 5c. Fgure 3 and column (d) of the table confrms that observed bddng s well below ths predcted RNNE behavor. j j Fgure 3: Observed wnnng bds and predcted bds under the assumpton of market dvson when bddng only aganst the computerzed bdder, SEK Bd Observed bd Nash Cost In order to see whether the opton to communcate has affected the magntude of the bds, we pool the wnnng bds and run equaton (3) wth D=1 for bds submtted n perods allowng for communcaton. bd = α 1 + α D + β1cost + β D Cost + ε, (3) 17

18 Column (e) n table 6 shows that the hypothess α =0 and β =0 cannot be rejected, suggestng that the possblty to chat has not affected bddng behavor. Although bdders to a large extent have formed collusve agreements (dvded the market) these have had lttle effect upon desgnated wnner s mark up on cost. Table 6: Bddng behavor under treatment I* All bds Perods Wnnng bds Perods Parameter not allowng for allowng for not allowng for allowng for Poolng wnnng communcaton communcaton communcaton communcaton bds t-rato (a) (b) (c) (d) (e) α (1.8) 79.9 (10.75) (9.) (8.98) α =0 (1.097) β (35.15) 0.75 (6.81) 0.68 (16.18) 0.6 (1.71) β =0 (-0.93) N R , * SEK, robust standard errors, t-rato n parenthess 5. Standard aucton wth non lnear cost (treatment II) In perods where collusve agreements have been reached, table 5 (above) shows that all three classes of colluson strateges have been used under treatment II. The sde payments were, however, prmarly concentrated to one specfc sesson. Most strkng s that t has now become much more dffcult to strke a deal. Snce we lack a clear theoretcal predcton of ndvdual bddng behavor n a stuaton wth two bdders havng non lnear, and one constant costs, the analyss s based on a comparson of observed bddng n perods wthout and wth a chat lne open. In the former perods about a thrd of all sngle bds were below the nduced cost (fgure 4), ndcatng that bdders tred to wn both contracts usng ther synerges. In several perods these bdders ncurred losses. 18

19 Fgure 4. Observed bds n treatment II, perods not allowng for communcaton (SEK) Bd Cost Bd In order to study the mpact of pre-play communcaton on bddng behavor, table 7 provdes the regresson results from perods not allowng for communcaton and perods allowng for communcaton. In the same way as n table 6 we present both the results from explanng bddng behavor when all bds and when only wnnng bds are ncluded n the comparson of perods wthout and wth the chat opton. We also nclude observed behavor under dfferent scale parameters. In both datasets the estmated bddng behavor resembles the bddng behavor we observed n treatment I; the ntercept of the estmated slope ncreases whereas the coeffcent decreases when subjects are gven the opton to communcate pror to bddng. Poolng the wnnng bds nto one dataset, and usng equaton (3), the results ndcate a dfference n bddng behavor across perods not allowng for chat and allowng for chat, respectvely. When subjects can communcate, they seem to be changng there behavor relatve to treatment I where earnngs were lower. The estmated dfference s, however, prmarly attrbutable to the case when synerges n the number of won contracts are large. 19

20 Table 7: Bddng behavor under treatment II* Parameter not allowng for communcaton Whole sample α 51.4 (5.54) All bds Perods allowng for communcaton not allowng for communcaton Wnnng bds Perods allowng for communcaton 76.9 (7.60) (4.04) (1.04) β (19.57) (18.07) (5.97) (6.1) N R Synergy 0.9 α (5.5) (6.7) 6.87 (3.8) (6.09) β (0.04) (37.8) (8.71) (1.6) N R Synergy 0.8 α (.81) 19.4 (5.90) (3.) (11.64) β (9.6) (6.01) (3.00) (1.58) N R * SEK, robust standard errors, t-ratos n parenthess Poolng wnnng bds α =0 (.51) β =0 (-.7) α =0 (0.57) β =0 (-0.46) α =0 (.39) β =0 (-.10) 5.3 Combnatoral aucton (treatment III) Table 5 (above) ndcates that far fewer collusve agreements were formed under the combnatoral mechansm than n the other two mechansms. In most of the cases where an agreement was reached, one of the bdders was desgnated to bd for both contracts aganst the computerzed bdder s two sngle bds. Bd data also ndcate that the desgnated bdder n general only submtted the package bd for AB and not any sngle bd. The rsk neutral bd functon for the desgnated cartel bdder, gven that he only submts a package bd for AB, s gven by equaton (4); see appendx B for a proof. The optmal collusve bd functon and the observed bds from perods where bdders agreed on bd rotaton are llustrated n fgure 7. 8 Agan, the observed mark-up over cost s relatvely low compared to predcted mark-up. 8 In all observed agreements, the desgnated bdders cost was below 499,5. 0

21 c AB 466 c AB ,67 + f c AB 499,5 b ( c AB ) = (4) ,67c AB f c AB > 499,5 Fgure 7. Collusve Bds and predcted collusve RNNE bds n the Combnatoral Aucton Bd Predcted collusve bds Observed bds Cost Smlar to the analyss of bds submtted under the standard mechansm when costs are nonlnear, we are not able to test observed behavor under treatment III aganst theoretcal predctons. In each of the perods where communcaton was not allowed, and n each of the fve sessons, both human bdders submtted a combnatoral bd for AB. Fgure 5 shows that the mark-up over cost was rather modest, on average 7,5 percent, whch s lkely to be below equlbrum. 9 9 Note that the average RNNE mark-up n a smple envronment (wthout synerges) s about 8%, gven our random costs for contract A and contract B (see fgure ). 1

22 Fgure 5. Package bds on AB n perods not allowng for communcaton Bd (AB) Bd Cost (AB) Except for ther package bd on AB, the bdders could also submt a sngle bd on contract A and a sngle bd on contract B. These bds are llustrated n fgure 6 where also the vrtual Nash behavor,.e. nterpretng sngleton bds as f no combnaton bd could be submtted, s ndcated. Fgure 6: Sngleton bds under treatment III n perods not allowng for communcaton Sngle bd Bd Nash Cost sngle contract

23 Table 8 reports the estmated coeffcents from both treatment I and III, usng these sngleton bds. Poolng the data we cannot reject the hypothess of dentcal ntercepts and coeffcents. Thus, when submttng sngleton bds n the combnatoral aucton, bdders adopt the same strategy as they do n a standard aucton, neglectng the nterdependence between ther sngle bds and ther combnatoral bds. A number of subjects have, however, ether refraned from submttng sngleton bds or submtted sngleton bds equal to the hghest possble bd by the computerzed bdder (SEK 300). Table 8. Estmated bd functon for sngle bds n treatments I and III, perods not allowng for communcaton Aucton (treatment) Parameter Standard aucton (I) Combnatoral aucton (III) α 68.1 (1.8) (4.80) β 0.77 (35.15) 0.79 (15.34) N R * SEK, robust standard errors n parenthess Fnally, we nvestgate the mpact of allowng pre-play communcaton on bddng behavor. In ths, we focus only on the observed package bds. Table 9 presents the same sort of comparson as table 7 above. Poolng the wnnng bds (last column) we cannot reject the hypothess of dentcal bddng behavor n perods wthout and wth communcaton. We therefore conclude that subjects seem to be less nclned or able to engage n cooperatve bddng n a combnatoral aucton that when the standard aucton format s used. Ths strengthens our mantaned hypothess that the possblty to submt combnatoral bds makes t more dffcult to collude. 3

24 Table 9: Bddng behavor under combnatoral aucton Parameter not allowng for communcaton Whole sample α 77.0 (.1) All bds Perods allowng for communcaton not allowng for communcaton Wnnng bds Perods allowng for communcaton (5.0) (3.97) (6.50) β (10.19) (6.4) (11.80) (1.43) N R Synergy 0.9 α (1.9) (4.47) (.55) (7.50) β (6.17) (5.07) (5.76) (9.01) N R Synergy 0.8 α (4.56) (1.78) (6.38) (3.04) β (8.73) (.67) (8.90) (3.76) N R *SEK, t-rato n parenthess Poolng wnnng bds α =0 (1.47) β =0 (-1.16) α =0 (1.7) β =0 (-1.1) α =0 (0.7) β =0 (-0.001) 6. Summary A couple of prevous studes have demonstrated that combnatoral bddng s better at establshng effcent allocatons than the standard one shot, sealed bd nsttuton when there are non-lneartes n the number of contracts awarded to a bdder. The research reported here ndcates that the possblty to submt combnatoral bds also may have an mpact on the possblty to collude. By allowng for combnaton bds t gets more dffcult for colluders to agree on a polcy whch boosts ther earnngs at the expense of the procurers costs or of effcency. We can therefore thnk about ths augmentaton of the bddng space as an addtonal polcy devce for reducng the chances of ntal colluson formng or ncreasng the chances of an exstng colluson to break down (see Coate 1985). 4

25 When analyzng actual bddng behavor durng the experments, we have been a bt surprsed that the ntroducton of a possblty to communcate does not generate more colluson and worse effcency performance than we actually see. The detaled analyss of bddng behavor has however establshed that there s a dfference between bds submtted under the standard mechansm (treatment II) between perods wthout and wth chat possbltes. Ths dfference dsappears when the possblty to submt package bds s ntroduced n treatment III. Ths s confrmed when we count the number of collusve agreements reached under the respectve treatments. Our man result s therefore that the standard one shot, sealed bd procurement aucton provdes possbltes for colluson whch evaporates under the new set of bddng rules. One reason for that the mpact of communcaton on effcency and cost stll s small could be that our envronment s a bt knd n ths respect; snce there are only three bdders and two contracts to be awarded, there are not so many ncorrect allocatons that can be establshed. Another possble reason s that snce the outsde (automata) bdder may dsturb any collusve agreement, t s dffcult for the two colluders to establsh a soluton where they both wn reasonably many tmes. It s an obvous challenge for further research to test whether or not our concluson s robust aganst alternatve expermental desgns. The second explanaton may also provde an llustraton of the mportance for partcpants n the asphalt cartel descrbed n secton to get rd of outsders. The presence of just one sngle compettor who breaks up the bddng pattern n the cartel s suffcent to almost wpe out the profts from controllng the market. 5

26 Although we nadvertently created an envronment where t s farly dffcult to collude where partcpants can only to a degree make use of the possblty to coordnate behavor t has stll been possble to establsh that combnatoral bddng affects behavor and enhances effcency. Real applcatons of combnatoral auctons may nvolve ten or more contracts and therefore a large number of feasble bd combnatons. In addton, the number of bdders s often more than three. Ths means that there may be an even better effcency-enhancng potental for the mechansm under real-lfe condtons than n our stylzed lab. 6

27 References Aoyag, M., 003. Bd Rotaton and Colluson n repeated Auctons. Journal of Economc Theory, 11, Brusco, S., Lopomo. G., 00. Colluson va Sgnalng n Smultaneous Ascendng Bd Auctons wth Heterogeneous Objects, wth and wthout Complementartes. Revew of Economc Studes, Coate, M., Technques for protectng aganst colluson n sealed bd markets. The Anttrust Bulletn, Wnter, pp Cramton, P., Schwartz, J. A., 000. Collusve Bddng: Lessons from the FCC Spectrum Auctons. Journal of Regulatory Economcs, 17, 9-5 Goswan, G., Noe, T.H., Rebello, M. J., Colluson n Unform-Prce Auctons: Expermental Evdence and Implcatons for Treasury Auctons. The Revew of Fnancal Studes, 9, No 3, Kelly, F., Stenberg, R., 000. A Combnatoral Aucton wth Multple Wnners for Unversal Servce. Management Scence, Kwasnca, A., 000. The Choce of Cooperatve Strateges n Sealed Bd Auctons. Journal of Economc Behavor & Organzaton, 4, Kwasnca, A.M., Sherstyuk, K., 003. Colluson and Equlbrum Selecton n Auctons, Mmeo, Department of Economcs, Unversty of Hawa at Manoa Lunander, A., Nlsson, J-E., 004. Takng the Lab to the Feld: Expermental Tests of Alternatve Ways to Procure Multple Contracts. Journal of Regulatory Economcs, 5 (1), Pesendorfer, M., 000. A Study of Colluson n Frst-Prce Auctons, Revew of Economc Studes, 67, Phllps, O.R., Menkhaus, D.J., Coatney, K.T., 003. Collusve Practces n Repeated Auctons: Expermental Evdence on Bddng Rngs. Amercan Economc Revew, 93, Porter, H. R., Zona, J. D., Oho School Mlk Market: An Analyss of Bddng. Rand Journal of Economcs, 30, Sherstyuk, K., Colluson wthout conspracy: an expermental study of one-sded auctons. Expermental Economcs (1), Sherstyuk, K., 00. Colluson n Prvate Ascendng Prce Auctons. Journal of Economc Behavor & Organzaton, 48,

28 Appendx A Table A1: Effcency Across Mechansms (standard dev n parenthess) Mechansm Average effcency - all perods n Average effcency - perods wth no chat n Average effcency - perods allowng for chat n Standard 0,9 (0,15) 84 0,9 (0,19) 3 0,93 (0,1) 5 Standard wth lnear cost Synergy 0,9+0,8 0,73 (0,39) Synergy 0,9 0,76 (0,30) Synergy 0,8 0,68 (0,49) 106 0,74 (0,37) 6 0,75 (0,33) 44 0,71 (0,4) 40 0,7 (0,7) 4 0,76 (0,8) 16 0,67 (0,53) Combnatoral wth lnear cost Synergy 0,9+0,8 0,89 (0,0) Synergy 0,9 0,86 (0,3) Synergy 0,8 0,95 (0,15) 110 0,91 (0,15) 67 0,88 (0,18) 43 0,97 (0,19) 40 0,88 (0,5) 4 0,85 (0,6) 16 0,93 (0,19) Table A: Test of Mean Effcency Across Mechansms H 0 : Effcency Comb. = Effcency Standard wth non lnear cost t-rato Combnatoral n Standard wth non lnear cost n All perods (both α= 0,9 and α=0,8) 3, Perods wth chat lne closed, Perods wth chat lne open, All perods when α= 0,9, Perods wth chat lne closed 1, Perods wth chat lne open 1, All perods when α=0,8 3, Perods wth chat lne closed, Perods wth chat lne open,

29 TableA 3: Test of Mean Effcency Across Sze of Synergy H 0 : Effcency α=0,8. = Effcency α=0,9 t-rato n α =0,9 n α=0,8 Standard wth non lnear cost All perods 1, Perods wth chat lne closed 0, Perods wth chat lne open 0, Combnatoral All perods, Perods wth chat lne closed 1, Perods wth chat lne open 1, Appendx B Let b f ~ U [ 0,1] C C ( b + b ) = f ( x) f(x) A C B = A, B ) ) 0 1 x ) f ( x) x F( b) = xdx 1 F( b) = b Π = ( b k) 1 dπ k = 0 b = + db 9 b 0 3 k + 3 b = 1 9

30 ) F ( b) xdx + ( x) dx 1 F( b) ( b k) ( b ) Π = dπ = 0 b = + db 3 1 b = k = ( b ) Transformaton of varables k = c a z a where c = desgnated wnner s cost for AB, a = lower lmt for z = upper lmt for C b (300). C b (33) ( z a) β = a + b where β s the desgnated wnner s bd ) β ( c ) AB = = c c AB AB c c + AB AB ) β 3 3 c AB ( c AB ) = = 00 + c AB 3 30