Collusion and Tricks in Auctions
In our study of auctions, we learned about the various types of auctions, including the Ascending bid (English) auction, the Descending bid (Dutch) auction, First-price sealed-bid auction, and Second-price sealed bid auction. Each of these auctions has advantages and disadvantages based on the application it is used for and, in theory, they work quite well to determine a fair selling price for seller and buyer. However, each of these auctions can be manipulated by persons with intent to either decrease (in the case of bidders) or increase (in the case of sellers and auctioneers) the final sale price. The article “Collusion and Tricks,” by Kate Reynolds discusses the various methods used by bidders and sellers to “game” the system to their advantage.
In the case of bidders, a prevalent collusion strategy is to establish a subset of bidders called a ring, whose objective is to reduce the sale price and share in the gains. This type of strategy is most useful when there is a limited number of bidders. Basically, a designated bidder is chosen from among the members of the ring, and all other ring members agree not to bid on the item. Then, the designated bidder purchases the item for a price significantly below true value. The ring members then hold a second auction amongst themselves at which time the winning bidder pays reimburses the designated bidder from the first auction the amount that he paid for the item in the first auction, and pays each member including himself an equal share of the difference between the amount he paid and what the designated bidder paid. In so doing, the winner gets the item at a discount and every member of the ring gets a monetary reward for his participation. This strategy is effective because it can be impossible for an auctioneer to detect the presence of the ring. Ascending bid auction formats are most vulnerable to the ring strategy, which may explain the popularity of sealed-bid auctions even though ascending bid auctions generally result in bigger payouts. English auctions foster the strategy because there is no incentive to betray the ring, whereas sealed-bid auctions may tempt ring members to bid higher in order to cheat the others. Interestingly, the Descending bid auction is least prone to collusion, because if someone betrays the ring by bidding higher, there is nothing anyone can do about it, because the auction is over.
There are many other bidder tricks. For example, if a famous art critic is bidding on a painting, he is aware that his very presence as a bidder will cause other bidders to raise their true values. To combat this, the critic may disguise himself, send an anonymous person to bid for them, or hide behind pillars when bidding. Other bidders will cast doubts about the authenticity of an item to scare off bidders and then bid and win the item at a reduced price. Sellers and Auctioneers also have their own bags of tricks. Sellers may hire bidders to artificially increase the bid and some auctioneers may look into an empty part of the room and accept a bid from someone who is not there just to artificially spur interest in the item. These are just a few of the methods used by participants to skew the results of an auction. Unfortunately, there is no way to completely prevent cheaters from violating the fairness of either of the auction formats.
References:
http://www.cap-lore.com/Agorics/Library/Auctions/auction11.html