COLLUSION AS VIEWED BY AN ECONOMIST

by Deb Weidenhamer

In my last column, I wrote of the unique perspectives of the auction industry that can be gained by looking through the eyes of industry outsiders. One group with interesting ideas is economists who specialize in auction theory. Previously we discussed the idea of the "winner’s curse", a theory advocated by Paul Klemperer, an economics professor at Oxford University. The winners curse theory says that every winning auction bidder is the person who knew the least about the value of an item and therefore always bids too much. Paying too much for an item purchased at auction is the "winners curse" and Paul Klemperer believes it is an all too common aspect of auctions.

While I do not agree with Paul Klemperer’s beliefs about the universal nature of the "winner’s curse", I do agree with another of his beliefs; that the other great weaknesses of the auction model of conducting business is the high probability of collusion. (For the purposes of this column we will expand the definition of auction collusion from several people conspiring to fix prices to anyone who behaves in a manner to artificially influence the auction process to create a monetary windfall.)

Bidder Collusion

The most common type of collusion occurs when bidders conspire to reduce the level of competition and therefore reduce the amount paid for an item. It is particularly common in frequently held auctions where there are a small number of regular buyers who form a bidding ring. The auction buyers all agree in advance to certain levels of bidding. The other members driving up all of the offending member's bids can punish any member of the bidding ring who violates the rules.More common are informal bidding rings. This collusion can be overt without any actual conversations occurring. Just a look or a nod is enough to make the collusion agreement. In a case where colluding bidders are buying many items, they may decide to engage in bid rotation by making alternating bids allowing first one bidder than the other bidder to have the winning bid on an items.

Another example of a bidder influencing auction bids is the case of the heavyweight bidder that makes it known that they are going to bid on an item. This often causes other bidders to not even make opening bids either because they are afraid the powerful bidder is willing to pay a high price so it is a waste of time even bidding or because the heavy weight bidder will punish the competing bidders by driving up the bids on other items.

Seller Collusion

Where bidder collusion involves trying to reduce the amount of the final bid, seller collusion involves trying to increase the amount of the final bid. This can be done by artificially increasing the number of bidders by using a shill (either real or imagined).

Auctioneer Collusion

This type of collusion is where an auctioneer hides valuable items within low value items. Such as placing an antique crystal spoon rest in the bottom of a box lot of cheap cut glass. Also auctioneer collusion can be to reduce the number of bidders by under advertising or intentionally miss-advertising an auction to decrease bidding competition to either benefit the auction or one of he auctioneer's buyers.

Preventing Collusion

Increasing the number of bidders helps prevent bidder collusion because it makes it less likely that everyone bidding on an item will be included in the bidding ring. It also decreases the likelihood the seller will engage in collusion to try to raise already satisfactory bid levels.Reserve auctions discourage collusion because it is unlikely that collusion will result in sufficient profits to offset the risk involved in colluding.In a situation where there is a strong bidder ring or a heavy weight bidder holding down bids, one of the best ways to prevent further collusion is the sealed bid auction. A secret sealed bid makes it dramatically more difficult for a heavy weight bidder to scare off other bidders or for a bid ring to detect a defector. However auctioneers hate sealed bid auctions because it takes them out of the loop and costs them business.Auctioneers don't like reserve auctions or sealed bid auctions and yet the auction industry seems to be doing little to prevent trends in this direction. The potential for collusion to result in a loss of business is the reason why everyone in the auction industry should take the problem of collusion very seriously. Currently the auction industry seems to have a tolerant attitude towards collusion similar to that of used car salespeople. Sellers who are not convinced they will receive fair prices will not sell at auction. Buyers will not attend auctions if they believe they are being forced to overpay.Most importantly, collusion of any type at auction is against the law. At one auction I conducted several years ago, I actually accused two bidders of collusion, because they had participated in the practice for several years and it was well known to auctioneers in the area. My mistake was to accuse them of the practice while I was selling on the auction block. I embarrassed them and myself at the same time. What I have found to be a much better practice is too simply involve my ring people in separating the suspected offenders. The ring people actually get in the personal space between the offenders and keep them from communicating. This creates so much confusion between the offenders that they are forced to bid on their own behalf in fear that neither party will be the winning bidder.

I am sure that you have developed some of your own tactics to prevent collusion that are far superior to those used at Auction Systems. However, I would suggest a review of your anti-collusion tactics. As an industry we must all work to stamp out collusion of any kind so we can offer a valuable experience to both our sellers and buyers.