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Nonratifiability of the Cartel Mechanism in First-Price Sealed-Bid Auction with Participation Costs

Hsueh, Shao-Chieh and Tian, Guoqiang (2009): Nonratifiability of the Cartel Mechanism in First-Price Sealed-Bid Auction with Participation Costs.

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Abstract

McAfee and McMillan (1992) investigate the coordinated biding strategies in a strong cartel, in which the cartel members can exclude new entrants and can make transfer payments, and show that the strong cartel mechanism is incentive-compatible and efficient. In this paper however, we show the strong cartel mechanism is no longer ratifiable in the presence of participation cost, in which case the bidder with the highest value in the cartel would have incentive to veto for the collusive mechanism. This behavior could make the maximum benefit for the winning bidder.

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