Auction Riggers Beat the Bank
http://www.huffingtonpost.com/2013/06/01/foreclosure-scams-auction-crackdown_n_3371595.html
As a result of the poor state of the United States economy, foreclosed houses are a common sight in almost every town. When a mortgage is not paid, the house is put up for auction by the bank in the hopes of regaining some of their losses. However, some conspirators have devised a plan to take most of the auction money for themselves, leaving the bank with an unpaid loan and a handful of cash worth a fraction of the house’s actual value.
Here’s how it works. A group of auction goers get together beforehand and agree to send one person to the auction. This sole bidder wins the auction for much less than the actual value of the house. Then, the group has a private auction between themselves. The winning bidder pays what he would have paid at auction, but the entire group splits the difference between the winning bid at the private auction and the winning bid at the official bank auction. For example, if the bidder wins the house for $10,000 from the bank auction and the winning bid of the private auction is $200,000, the conspirators sell the house to the $200,000 bidder in the private auction, give $10,000 back to the bidder, and split $190,000 among themselves.
This method of “bid rigging” allows the group of bidders to temporarily forgo traditional auction game theory. While the bank auction would normally be an ascending bid auction with each bidder’s dominant strategy to remain active until his value is reached (as seen in Chapter 9), the bidder sent by the group is virtually guaranteed to win the auction for much less than his value without competition.
Here is the question: Why is joining the group more attractive than being a single rogue bidder? Say there are four people interested in bidding on the house. Three of the people are part of a group and the other person can either join the group or be a lone bidder. As shown in the table below, if the single player joins the group, bids his value, and wins the private auction, he pays (value/4) less than he would have paid if he won the bank auction on his own. If the single player loses the auction but joins the group he gets one fourth of the difference between the private auction’s winning bid and the winning bid in the bank’s official auction. However, if he loses the official auction on his own, he gets nothing. As discussed in Chapter 6, a player’s dominant strategy is one that is a best response to every strategy of the other player. In both cases, the player’s best response is to join the group and bid his value, so this is his dominant strategy.
However, since the government has become aware of this auction scam technique,
entering the group could also earn you a date in court.