Chapter 4
Participation Screen for Collusion
in Auctions1 4.1 Introduction
I propose one new statistical method and use one existing method to test for collusion in a territorial allocation setting. Both of these tests can be applied to any institutional setting where independent and mutually exclusive markets can be defined. However, I discuss them in the light of my application, which is a procurement auction. Due to their simultaneous nature, auctions are particularly well suited for the static esti- mation methods that are applied here. Moreover, in auctions it is easy to argue the independence of the markets under scrutiny. These tests are based on the participa- tion decision of the bidders instead of the bid levels. Collusion is defined here as an explicit arrangement among a group of bidders that limits competition between the participants. Collusion can take many forms in auctions. Typical methods include different contract allocation mechanisms, like territorial allocation or job rotation, and submitting phony bids. The previous literature on detecting collusion in auctions has studied only phony bidding scenarios.
I test whether the participation of one bidder affects the participation decision of other bidders. In the competitive setting the identity of competitors should not affect the participation decision, given that the auctioned contracts are identical and the bidders are symmetric. For strategic reasons bidders would like to avoid each